Relationship between Earnings and Share Price in Nairobi Stock Exchange

Research Report

Abstract
Here in this, the investigation was considered to inspect the observational connection between
the earning and the equity share prices of the corporation that are recorded on the Nairobi stock
trade. Here an example of 40 corporations are mulled over through which the outcomes are
caught to boost the presentation. various corporations from the diverse business are contemplated
with the end goal of this examination. All the market variables which include the EPS, DPS, P/E
ratio, POR, PBV. This is essential to identify the connections between the price of the shares of
the company and factors that influence it. The most basic factor such as per-share price and its
earning are considered in the corporation for identifying the influence impact of share prices on
the market. It is seen that if the volume in the particular stock increases and the demand for the
stock increases then it would affect the company’s price and it would move upwards. Whereas, if
the selling in the stocks increases then the price may go down. Also, the government policies,
performance of the industry have some potential effect on the demand and the behaviour of the
share price and stock market. The price of the equity share can change according to the macro or
microeconomic factors. Some of the macroeconomic factors include politics and general
economic condition. hence in the present study, the factors that include the affiliations between
the market price of the share and its effect on the actual market prices of the company would be
classified. In the current research, this was seen that variables correlated with the share price of
the company. hence in the research DPS and PBV were taken into control to control the variable.
DPS is considered to be having a stronger and good relationship with the price of the share as
compared to the other form of elements. While the other variables that were taken into
consideration include POR.

Contents
Research Report...............................................................................................................................1
Abstract............................................................................................................................................2
Chapter One: Introduction...............................................................................................................5
1.1 Background of study..............................................................................................................5
1.2 Earnings of the company.......................................................................................................6
1.3 Determination of the share price............................................................................................6
1.4 What is the relationship between that earnings and share price............................................7
1.5 Nairobi securities exchange (NSE)........................................................................................7
1.6 Research problem..................................................................................................................8
Research Question...........................................................................................................................9
Research objectives.........................................................................................................................9
Chapter two: Literature Review.....................................................................................................10
2.1 Introduction..........................................................................................................................10
2.2 Theoretical Framework........................................................................................................10
2.3 Efficient Market Hypothesis................................................................................................10
2.4 The Three Links Theory......................................................................................................11
2.5 Signalling Hypothesis..........................................................................................................12
2.6 Earnings Multiplier Model..................................................................................................12
2.7 Factors which affect Share Price.........................................................................................13
2.8 Empirical Research..............................................................................................................13
2.9 Summary of Literature Review...........................................................................................16
Research methodology: Chapter three...........................................................................................17
3.1 Introduction..........................................................................................................................17
3.2 Design of the research.........................................................................................................17
3.3 Population for the process of investigation.........................................................................17
3.4 Sampling Method.................................................................................................................17
3.5 Methods of information collection......................................................................................18
3.6 Analysis of data...................................................................................................................18
3.7 Key variable evaluation.......................................................................................................19
3.7.1 EPS earning per share...............................................................................................of 19

3.7.2 Share price....................................................................................................................19
3.7.3 (DPS) Dividend per share.............................................................................................20
3.7.4 Prices to Earning Ratio.................................................................................................20
3.7.5. Dividend payout ratio..................................................................................................20
3.7.6 Price to book value.......................................................................................................21
Chapter four: Data Analysis..........................................................................................................22
4.1 Regression coefficient.................................................................................................of 22
4.2 Test of significance predictor variables...........................................................................23
4.4 ANOVA...........................................................................................................................25
4.5 Discussion of finding.......................................................................................................26
Chapter five: Conclusion and Recommendations..........................................................................28
References......................................................................................................................................29
Appendix........................................................................................................................................34

Chapter one: Introduction
1.1 Background of the study
The earnings of the company are considered to be measured through the company profit and loss
situation where the business activities and events occur during the period of the study. This is
viewed as speaking to the proportion of the adjustment in the value of the firm which empowers
the normal and the equity shareholders to recognize the value of the firm that they claim. The
share prices are considered to be the amount of the single shares of a corporation which are
proposed for selling. It is considered that the market prices of the company are determined by the
demand and the supply of the actual safety of the company in the market (Adesina, 2017). This is
seen that the efficient market hypothesis confirms that the markets are considered to be efficient
and the market shares price are reflected through the related evidence that is available in the
market. hence this can be considered that the market would give their reaction to the available
information quickly and would be considered for maximising the performance of the company.
this is considered that the signalling and the hypothesis help in getting the information that is
available between the investors and the firms’ managers of the company. As this is considered
that the information that is realised by the company is utilized by the shareholders for fulfilling
the aim of investing in the company. as the information that is presented by the company to the
investors helps in considering the financial health of the company, it also helps in understanding
the prospects of the company. This is seen in the earlier multiplier assets that the earnings are
considered to be one of the most important determinants for the actual worth of the share of the
company (Akinkoye & Seriki, 2018).
According to the present scenario, the NSE is considered to be the prime stock exchange in the
context of the African market. while on the other hand it is considered to be the fifth-largest
stock exchange in the country in terms of the market capitalisation as a percentage of GDP. The
NSE is considered to be the main security exchange in Kenya. Hence most of the studies that are
on the stock exchange is done on this stock exchange. This is seen in the most of the market
where it is seen that price volatility has different factors which are related to the unit trust and the
returns, also the general elections and the different economic condition of the country also
affects the share price of the market. This is seen that the price volatility is considered to be

having a negative correlation with the investment in the developing market of the countries (Al-
Lozi, et. al., 2016).
This is significant for the individual to build up the information of the powerful factors of the
stock cost as this is viewed as a significant advance to choose the terms to put resources into the
stock trade. This is considered to be crucial for the investor in the stock exchange to be
reasonable for the share price and to determine the date to predict the future changes in the stock
price of the company, as this helps in determining the future of the stock exchange of the
company. This is likewise viewed as that a few pieces of the arrival turn out from the adjustment
in the stock trade, where the expanding propensity is watched to recognize the stock price
forecast in the capital market of the nation. hence this can be studied that earnings are one of the
important factors that help in influencing the share price of the company (Angahar & Malizu,
2015). it is also seen that both the trading volume and the return volatility of the company
increases the time of earnings announcements.
1.2 Earnings of the company
This is considered that firms earnings represent a measure of making the change in the value of
the firm to the equity shareholders of the company. the common formula for the earning is
considered to be achieved by deducting revenue from the cost of sales, taxes and the operating
expense that are given for the period of the study. Hence this can be considered that annual
earnings per share is used to make the comparability between the revenues of the other firms of
the company (Anwaar, 2016).
In the income multiplier model that is specified as Price/Earnings, this has been argued that
earning is considered to be a most important aspect that helps in determining the financial health
and the worth of the company in which the investment is supposed to be made by the company.
it is considered that the investor of the company decides on the public information that is
available to them regarding the earnings. These are taken as an indicator by the investors for
making the financial health and to invest the same. these are considered for determining the share
price of the company and earnings are used by the investors to identify the profitability and
efficient management of the company.
1.3 Determination of the share price
This is seen that the share price of the company is the price of the single share of the company
which are trading in the stock exchange of the country. the share price that is taken found at a

particular time at the stock exchange is the balance that is struck between the buyer and the seller
of the particular stock. This is seen that the price that is determined at the stock exchange
represents the Wisdom and the knowledge of the market that is taken into consideration. where
there is changes in the price of the stock is determined through the return on the investment on
the stock. Hence this can be said that the share price is one of the most important factors which
helps in taking the investment decision by the investors of the company. this is seen that it is
chiefly controlled by the powers of interest and supply of the specific security in the financial
exchange. henceforth this is seen that the everyday stock price of the corporatation can be
resolved through the stock trade market (Asif, et.al., 2016).
1.4 What is the relationship between that earnings and share price
It can be analysed from empirical research that EPS is considered to be one of the strongest and
relatable factors that helps in identifying the share price of the company. As per the research that
has been done by various researchers this is seen that the determinants of the share price are the
main attribute for the same. this is seen that earnings are considered to be one of the factors
through which the share prices of the company are influenced.
As indicated by the creator this is viewed as that present period earnings helps in giving the data
in order to foresee the future time frame earnings for the equivalent and the future time frame
earnings helps in giving the data to build up the desires that the profits, later on, would be earned
by the venture that is made for the equivalent. Hence this plays an important role in determining
the share price of the company (Baines & Hager, 2019).
1.5 Nairobi securities exchange (NSE)
This is seen that Nairobi securities exchange is the main and the most traded securities exchange
in Kenya. The exchange was contributed in the year 1954 and was made for overseas stock
exchange while Kenya was under the control of the British empire where the permission was
granted for trading under the London stock exchange. Here this was considered that two indices
were made to measure the performance of the stock exchange. The NSE 20 share index is
considered to be one of the most important indexes that have been taken into consideration since
year 1964where the 20 Blue-chip companies were taken into consideration for trading in the
stock exchange these companies were considered to be the companies that have the fundamental
and were having consistently returned in the positive financial results. In the year 2008, the
Nairobi stock trade all share record was presented by the administration as an elective file.

Kenya is one of the newest markets in Africa and the NSE is the biggest stock trade as far as the
exchanging volumes. This is seen that the status of the economy can generally be considered
because of the presentation of the stock trade of the nation. this is seen that the role in the process
of economic development is considered to be processed by the stock exchange of the country.
this is seen that there is a need to develop the capital market in the country so that they can
maximise the economic condition and bring the development in the country. hence there is a
need to consider the matters that do with the capital market in the country (Baybordi, et. al,
2015). it is seen that NSE is the only stock exchange in the country where most of the research
work has been performed for this purpose of the study. but this is seen that no research has been
processed for finding the relationship between the earnings and the share price of the company
which has been carried out for the study. hence the need to study the relationship is developed
where the earning and the share price is based on the market scepticism.
The NSE is regulated through the capital market Authority where there are a system of rules and
regulations that are taken into consideration. These rules are enacted by the parliament of the
country. hence to choose the data and consider the effects the study of the shares that are listed
on the stock exchange are considered. here around 40 stocks are taken into consideration for the
purpose and the price of the stocks on the real time basis were identified for analysing the data.
The data includes the instrument code, bid price, ask price and various other trade-related
information for the study (Cormier, et. al., 2019).
1.6 Research problem
This is seen that the signalling theory helped in finding the information between the managers
and the investors. This can be considered that earnings are used as a tool to convey private
information that is available to the shareholders of the company. the earning is considered to be
one of the most important terms that is used by the managers of the company about the state of
the health of the firm and the future aspects and its prospects. Three theoretical links have been
found between the earning and the share price. This is considered that these provide the
information to develop the expectation for the future dividend. Hence this helps in providing
information to determine the share value. The earning information that is triggered makes the
change in expectation of the investors to develop the future dividends for the correspond and the
change in the market value of the firms.