Small firm effect on stock market returns at the Nairobi Securities Exchange

Abstract

The study sought to investigate the existence of small firm effect at the Nairobi Securities Exchange. The secondary data for analysis was gathered from the firms listed at the NSE. The listed stocks were divided into 4 quartiles based on market capitalization. The study used only two quartiles (quartile one and quartile four) in the analysis. Quartile One consisted of the largest firms while Quartile Four consisted of the smallest firms as per market capitalization. Analysis of the data was done with the aid of SPSS (version 21) and Microsoft’s Excel (2013). NSE All Index (NASI) was used as the proxy for market stock returns and was regressed against the small firm and big firm stock returns. The study established that there is a very strong relationship (R= 0.740) between market returns and small firm stock returns. The adjusted R-Square value of 0.964 implies that 96.4% of the total variance in market stock returns can be attributed to changes in small firm stock returns and big market stock returns. To test the significance of individual parameters, the T-test was used. Further, ANOVA statistics established that the regression model was highly reliable and good for data at 100% confidence. The study established that there is a positive and statistically significant small firm effect on the stock listed at NSE. This study concludes that there is a positive and statistically significant small firm effect at the NSE. This implies that market stock returns are highly influenced by the stock of small firms. The stock investors who want to make profit in stock trading should invest the stocks of small firms. The researcher recommends that investors wishing to make more profit in stock trading should invest more on the stocks of the small firms listed at the NSE.