Value premium and the effect of size: evidence from Nairobi stock exchange
Abstract
Fama and French report a value premium of 7.86 % per annum on the universe of NYSE,
AMEX and NASDAQ for the period 1963 to 1995. Loughran( 1997), however establishes
that the value premium is driven by small cap stocks. In his study of the three stock
exchanges he finds no book-to market effect for large cap stocks and that the largest book-to
market effect occurs for the smallest cap stock. At the NSE Muhoro (2004) establishes the
existence of a weak value premium and Ngigi (2006) reports no significant difference
between value and growth stock. We set out to investigate the existence of value premium
and the effect of size at the NSE. Our findings report the existence of value premium
averaging 0.5 % per month on portfolio based on B/M ratio and 2.34% on portfolio based on
E/P. Contrary to Loughran( 1997) findings we establish that the value premium at the NSE
is driven by large cap firms which register a value premium excess of small cap firms by
1.01% monthly average return on portfolio based on B/M ratio. No substantial differences in
findings are found whether portfolios are analysed based on B/M or E/P ratio
Citation
MBA ThesisSponsorhip
University of NairobiPublisher
School of business