Price to Book Value Ratio and Financial Statement Variables (An Empirical Study of Companies Quoted At Nairobi Securities Exchange, Kenya

Abstract

This study set out to establish the relationship between price to book value ratio and the following financial statement variables: dividend payout ratio, return on total assets, return on equity, return per share, dividend per share and growth rate of earnings after tax for companies quoted at the Nairobi Securities Exchange (NSE). This is because not much is known about the factors that impact on the price to book value ratio since most of the studies on this ratio have been carried out in developed capital markets and their applicability in developing capital markets such as the NSE has not been empirically tested. Companies that comprise the NSE 20 share index were used to predict the price to book value ratio. The data collected was summarized and multiple linear regression analysis was used to estimate the price to book value ratios. Price to book value ratio was the dependent variable and proxies for dividend payout ratio, return on total assets, return on equity, return per share, dividend per share and growth rate of earnings after tax were the independent variables. This study concluded that there was a statistically significant relationship between price to book value ratio and the following financial statement variables: return on total assets, return on equity, return per share and dividend per share at the NSE, Kenya. In addition, there was no statistically significant relationship between price to book value ratio and the following financial statement variables: dividend payout ratio and growth rate in earnings after tax at the NSE, Kenya. The best predictor variables of the price to book value ratio were return on total assets, return on equity and dividend per share. This study also concluded that return on total assets, return on equity and return per share all had a positive relationship (positively affected) the price to book value ratio while dividend per share had a negative relationship (negatively affected) the price to book value ratio.