| dc.description.abstract | Economists as well as investors have examined anomalies on the stock exchange around the
world for decades. There are enough empirical studies that show that both practical people and
investment analysts use the Price Earnings ratio as a variable to make their investment decisions.
These studies analyze whether a security is overvalued or undervalued. This anomaly is called
the price earnings effect. This study sought to establish whether there is a relationship between
the P/E ratio and stock returns at the Nairobi Securities Exchange.
The P/E ratio of the listed stocks in the Nairobi Securities Exchange was computed annually
from 2008-2013.The companies yearly return was calculated for the same period. To examine if
there existed a Price Earning effect, the share return was compared to the Price Earnings ratio to
determine if there was a significant difference in return.
After careful analysis of the results and conducting a t-test at a significant level of 95% with a
5% risk level, the share return proved to be statistically insignificant to the Price Earnings Ratio
showing that the ratio did not influence the share return at the Kenyan securities market. This
result answers the research question and verifies that a price earnings effect did not exist on the
Nairobi Securities Exchange during the period 2008-2013and that it was in fact not possible to
make an abnormal return using the PE ratio as the only investment strategy. The study
recommended that since the data used the reported Earnings per share in the company financial
statements, normalized EPS should be used as it excludes extraordinary and one off earnings
items. | en_US |
