The Relationship Between Equity Prices And Financial Performance Of Commercial Banks Quoted On The Nairobi Securities Exchange

Abstract

This study sought to establish the relationship between equity prices and financial performance of commercial banks quoted at the Nairobi Securities Exchange. A number of firm valuation models in finance use different financial performance measures to arrive at the firm value. These include the income approach (capitalisation of earnings) and the dividend approach (Gordon’s Dividend Model). This study included both earnings per share and dividend per share as independent variables of measuring financial performance. Additionally bank specific ratios of core capital to risk weighted assets and liquidity ratio were included as independent variables. Commercial banks in Kenya have continued to register impressive financial performance and this study set to determine whether this has had an impact on their share prices. The population of the study was all banks listed continuously at the NSE during the period 2007 to 2011. There were a total of 8 banks as two did not meet the requirement of being continuously listed through the study period. Pearson correlation coefficient showed a strong positive relationship between share prices and earnings per share, dividend per share and liquidity. However, the relationship between share prices and core capital to total risk weighted assets ratio was negative and weak. Multiple regression analysis showed that all performance measures had a positive relationship with shares prices. However, only the relationship between share price and dividend per share was found to be statistically significant.