Neglected Firm Effect and Stock Returns at the Nairobi Securities Exchange

Abstract

The theory of neglected firm effect explains why lesser-known firms tend to generate higher returns on a risk adjusted basis on their securities than well-known firms. Market analysts tend to ignore these firms because of information deficiency and low liquidity. The objective of this study was to investigate the existence of the neglected firm effect at the Nairobi Securities Exchange and it covered a period of six years from, 2010 to 2015. Three portfolios namely, the popular, normal and neglected were formed on the basis of the monthly trading volumes for firms listed at the NSE. The daily share prices and mar-ket index from the NSE were used in determining the actual returns, expected returns and abnormal returns. The results of the study indicated that the popular portfolio earned an average annual abnormal return of 4.48 percent to 3.01 percent earned by the neglected portfolios and thus this study concludes that the neglected firm effect does not exist at the NSE. However, there is need to carry more researches on this market anomaly including if there is any statistical relationship between the January effect, the neglected firm effect and the small size effect. The government, the regulator and other stakeholders should strive to develop the capital market to make it more efficient and devoid of malpractices.