Assessing the Appropriateness of Classification of Listed Companies by Financial Ratios in Nairobi Securities Exchange

Abstract

The fact that different groups of companies, whether small, new, big, service or manufacturing receive different classification at the Nairobi Securities Exchange invites the explanation that different groups must differ according to some discriminating characteristics valued and considered in the financial market. This study sought to assess the appropriateness of classification in the Nairobi Securities Exchange using financial ratios as predictor variables and the sector classification as the existing classification with the aid of discriminant analysis. From the results, the study concludes that the classification as done by the NSE is not appropriate and is not adequate as well. The study also concludes that financial ratios that are common to all listed companies at the NSE can be used to discriminate the listed companies into the different groups. Discriminant analysis is also appropriate for classification purposes at the NSE.