| dc.description.abstract | The overall objective of this study was to examine relevance of firm fundamentals in explaining
stock returns of non financial firms listed at the Nairobi Securities Exchange. The fundamental
factors considered are change in total assets, change in revenue and change in financial leverage.
The specific objectives of the study were to determine the relationship between stock returns
change in total assets, change in revenue growth and change in leverage; to determine the effect
of change in total assets, change in revenue and change in leverage on stock returns. Existing
studies based on fundamental analysis of firms characteristic at the Nairobi Securities Exchange
have not considered the effect of changes in total assets, changes in revenue and change in
financial leverage on stock returns. The study employed a descriptive research design. A census
targeting the 44 non-financial firms listed between the years 2004 and 2013 was conducted. The
study used secondary data obtained from Nairobi Securities Exchange authorized data vendors
and companies published financial statements. The relationship between stock returns and the
three fundamentals was measured using the Karl Pearson moment correlation coefficient while
regression analysis was used to determine the effect of change in total assets, change in revenue
and change in financial leverage on stock returns. The overall significance of the model was
tested using F test while the significance of the individual independent variable was tested using
t-test. The study found a weak positive correlation between stock returns and change in total
assets, while change in revenue and change in financial leverage exhibited a negative
relationship with stock returns. However, the relationship between stock returns, change in total
assets, change in revenue and change in financial leverage was found to be not significant. The
coefficient of determination R2 for the regression model was found to be 0.3% indicating that the
model had very low explanatory power. The result of F test indicated that the overall regression
was not significant at 5% level of significance. The t-test for the significance of change in total,
change in revenue and change in financial leverage showed that the three variables were not
significant in explaining stock returns. The study concluded that change in total assets, change in
revenue and change in financial leverage cannot be used to meaningfully estimate stock returns
for non financial firms listed at the Nairobi Securities Exchange. Investors should not rely on
information contained in change in total assets, change in revenue and change in financial
leverage in selecting their investment stock at the Nairobi Securities Exchange. Also managers
cannot rely on changes in these variables as indicators of the effect of their decisions on value of
their firms. Further studies may explore what fundamental factors significantly influences stock
returns at the Nairobi Securities Exchange by further analyzing the information reported in
financial statements. Such study may evaluate the effect of managerial discretion that results in
change in total assets, change in revenue or change in financial leverage due to accrual and due
to real change in firms’ cash flows. | en_US |
