Profitability, Investment Factors and Trading Volume Adjustment on Equity Risk Premium an Empirical Evidence from Nairobi Stock Exchange

Abstract

Purpose: Equity markets have always fascinated and challenged financial researchers with their complexities and broad implications. This Study investigated the effect of profitability measures and investment factors on the Equity Premium of companies listed on the Nairobi Securities Exchange (NSE) from 2011 to 2022. Design/ Methodology/Approach: The research design used in this study was the time series regression approach of Black, Jensen, and Scholes (1972). The target population comprises companies in the Nairobi Securities Exchange (NSE). Secondary data was obtained from the NSE database. This study used panel data from over ten years of cross-section analysis. An autoregressive integrated moving average model (ARIMA) of controlled variables methodology was used on the FamaMac Beth portfolio formation. Findings: The finding implied a significant relationship between profitability and the Equity Premium of listed companies on the Nairobi Securities Exchange during the period of Study. The Study found no significant relationship between investment policies and the Equity Premium of listed companies on the Nairobi Securities Exchange (NSE). There was significant relationship between trading volume as measured by liquidity and the Equity Premium of listed companies on the Nairobi Securities Exchange. Implications/Originality/Value: The study will be helpful to those who seek to rebalance their portfolios, given the Fama French Model factors. Regulators and the policymakers could adopt appropriate policies to limit the damage to the real economy.