Investigating The Effect Of Selected Micro-economic Factors On Ordinary Share Prices For Firms Listed In NSE, Kenya

Abstract

The market price of a share is a major factor that influences investors in their investment decisions. One of the major indicators and consideration by potential investors and investors on decision on whether to invest is actually the share price movement(Gill et al 2012). The share price is normally not static but rather changes every day.An important avenue of investments that yield considerable return is through investments in ordinary shares. This also acts as a source capital to firms in need of cash for investments. Returns and prices of such investments depend on various factors. These factors could either be internal or external factors. The knowledge of which explanatory factors and to what extent they affect the share price and their impact are very important for the firms and investors to help make investment decisions. Dividend was found to have significant positive effect on share prices which is in line with the dividend relevance theory developed by Gordon (1963) and Linter (1962). Dividend seeking behavior will lead investors to prefer stocks that pay higher dividends. Investors prefer near dividend to the future expected returns from investments which are considered more risky. There was a significant positive relationship between EPS and MPS at NSE, Kenya. Before investing in a firm every investor needs to know the level of a firm’s profit. The net assets value of firms also reported a positive influence on MPS and was significant at 95% confidence interval. The relationship between the price earnings ratio and MPS was also found to be positive. P.E ratio represents market expectations on the firm’s future performance. A higher P.E ratio indicates that investors expects the firm to have higher future earnings and thus are willing to pay more to acquire the firm’s stake through shares. The relationship between the P.E ratio and share price is expected to positive. A lower P.E ratio thus indicates that an investor would recoup back his investment in a relatively shorter period while the converse is true. Leverage (DE) reported a negative relationship with the MPS. The DPO was found to have a negative influence on share price. This means that although firms need to pay a higher dividend to attract investors, this should not be at the expense of the retention. This is in line with the tax preference theory.