The aim of this study was to examine the relationship between financial performance and stock returns for firms listed at the Nairobi Securities Exchange (NSE). The study used a descriptive research design and targeted a population of 67 firms listed at the NSE. The study used only secondary data, which covered a period of 5 years from 2011 to 2015. The study employed Ordinary Least Square (OLS) Regression method to estimate the market model parameters (to be used in determining residual effect). The study also adopted multivariate correlation analysis to establish the correlation between financial performance and stock return. The correlation results found a significant positive correlation between financial performance, share price levels and stock returns but found an insignificant positive correlation between dividend payout ratio and stock returns of the listed firms. The results of the regression coefficients found an insignificant positive relationship between financial performance, share price levels and dividend payout (DPR) and stock returns of firms listed at the NSE. The study concluded that there is a direct relationship between financial performance and stock returns hence an increase in financial performance of the listed firms increases stock returns of firms listed at the NSE. The study also concluded that shares prices and dividend payout has a direct impact on stock returns hence an increase in shares prices and dividend payout increases stock returns of listed firms. The study recommends that the management of firms listed at the NSE should strive to improve the financial performance and develop an optimal dividend payout policy, which maximises the returns of their firms.
Keywords: Financial Performance, Stock Return, Nairobi Securities Exchange, Share price levels and Dividend payout