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The Effect of Earnings Yield on the Stock Returns of Firms Listed at The THE EFFECT OF EARNINGS YIELD ON THE STOCK RETURNS OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE FRANCIS MWAURA KINUTHIA A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF SCIENCE IN FINANCE, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI NOVEMBER 2020 DECLARATION This research project is my original work and it has not been presented and submitted to any in university or college for examination. Signed…………………… Date…………………….. Francis Mwaura Kinuthia D63/19655/2019 This research project has been submitted for examination with the authority and approval as the university supervisor. Signed………………………… Date………………………………01/12/2020 Dr. Angela Kithinji Lecturer, Department of Finance and Accounting School of Business, University of Nairobi ii ACKNOWLEDGEMENT I would like to thank the Almighty God for giving strength to successfully complete the project. I would also like to thank my supervisor Dr. Angela Kithinji for her immense support and guidance in writing this project. I would also express gratitude to my friends, colleagues and family for supporting and encouraging me throughout my years of graduate studies and entire process of my research. iii DEDICATION I dedicate this project to my lovely wife Martha and our children Jade, Joy and Leo for their love, support and encouragement. iv TABLE OF CONTENTS DECLARATION........................................................................................................................... ii ACKNOWLEDGEMENT ........................................................................................................... iii DEDICATION.............................................................................................................................. iv ABBREVIATIONS ....................................................................................................................... x ABSTRACT .................................................................................................................................. xi CHAPTER ONE: INTRODUCTION ......................................................................................... 1 1.1 Background of the Study .......................................................................................................... 1 1.1.1 Earnings Yield ................................................................................................ .............. 2 1.1.2 Stock Returns .................................................................................................. .............. 3 1.1.3 Earnings Yield and Stock Returns .................................................................. .............. 5 1.1.4 Nairobi Securities Exchange ........................................................................... .............. 6 1.2 Research Problem ..................................................................................................................... 7 1.3 Research Objective ................................................................................................................... 9 1.4 Value of the Study .................................................................................................................. 10 CHAPTER TWO: LITERATURE REVIEW .......................................................................... 12 2.1 Introduction ............................................................................................................................. 12 2.2 Theoretical Background .......................................................................................................... 12 2.2.1 The Efficient Market Hypothesis .................................................................... ............ 12 2.2.2 Random Walk Hypothesis .............................................................................. ............ 14 2.2.3 Capital Asset Pricing Model ........................................................................... ............ 15 2.3 Determinants of Stock Returns ............................................................................................... 16 2.3.2 Dividend Yield ................................................................................................ ............ 18 2.3.3 Price Earnings Ratio ....................................................................................... ............ 19 v 2.3.4 Firm Size ......................................................................................................... ............ 20 2.4 Empirical Studies .................................................................................................................... 21 2.5 Conceptual Framework ........................................................................................................... 28 2.6 Summary of Research Gaps .................................................................................................... 30 CHAPTER THREE: RESEARCH METHODOLOGY ......................................................... 31 3.1 Introduction ............................................................................................................................. 31 3.2 Research Design...................................................................................................................... 31 3.3 Target Population .................................................................................................................... 31 3.4 Data Collection ....................................................................................................................... 32 3.5 Data Analysis .......................................................................................................................... 32 3.5.1 The Model of Analysis ................................................................................... ............ 33 3.5.2 Diagnostic Tests .............................................................................................. ............ 33 CHAPTER FOUR: DATA ANALYSIS, RESULTS, AND FINDINGS ................................ 36 4.1 Introduction ............................................................................................................................. 36 4.2 Response Rate ......................................................................................................................... 36 4.3 Diagnostic Tests ...................................................................................................................... 36 4.3.1 Normality Test ................................................................................................ ............ 37 4.3.2 Homoscedacity Test ........................................................................................ ............ 37 4.3.3 Test for Multicollinearity ................................................................................ ............ 38 4.3.4 Tests for Autocorrelation ................................................................................ ............ 38 4.3.5 Unit Root Test ................................................................................................. ............ 39 4.3.6 Test for Random and Fixed Effects ................................................................ ............ 42 4.4 Inferential Statistics ................................................................................................................ 43 4.4.1 Correlation Analysis ....................................................................................... ............ 44 4.3.2 Multiple Linear Regression ............................................................................ ............ 45 4.4 Interpretation and Discussion of Findings .............................................................................. 47 vi CHAPTER FIVE: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS ........... 51 5.1 Introduction ............................................................................................................................. 51 5.2 Summary of Findings .............................................................................................................. 51 5.3 Conclusion .............................................................................................................................. 52 5.4 Recommendations ................................................................................................................... 53 5.5 Limitations of the Study.......................................................................................................... 53 5.6 Recommendations for Further Study ...................................................................................... 54 REFERENCES ............................................................................................................................ 56 APPENDICES ............................................................................................................................. 60 Appendix I: Companies Listed at the NSE on or before 31st December 2013. ............................ 60 Appendix II: Data Collection Form .............................................................................................. 62 Appendix III: Research Data ........................................................................................................ 63 vii LIST OF TABLES Table 3.1: Operationalization of the Study Variables .............................................................. 35 Table 4.1: Shapiro-Francia
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