IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 16, Issue 5. Ver. III (May. 2014), PP 79-89 www.iosrjournals.org www.iosrjournals.org 79 | Page The Relationship between Firm Performance as indicated by Financial Performance and Equity Market Premium. A Case of Safaricom Kenya Constance Nganga 1 Prof. Namusonge G. S. 2 Oluoch J. Oluoch 3 , Dr. Musiega Douglas 4 1 Masters Student Jomo Kenyatta University of Agriculture and Technology, Kakamega campus 2 Lecturer Jomo Kenyatta University of Agriculture and Technology, Kakamega campus 3 Lecturer Jomo Kenyatta University of Agriculture and Technology, Juja campus 4 Director Jomo Kenyatta University of Agriculture and Technology, Kakamega Campus Abstract: The paper was done in the context of the Kenyan equity market which was represented at Nairobi Securities Exchange (NSE) for safaricom, a telecommunication firm. In this study excess returns over risk free rate was taken as dependent variable while market excess over risk free rate as independent variable .This study covers five and a half year period covering July 2008 through December 2013, the period over which Safaricom has existed as a listed company at the Nairobi Securities Exchange (NSE). Ordinary Least squares method was adopted in a linear asset pricing model to establish the statistical significance of the return premium over the NSE return. The findings indicate that Safaricom has a small return premium over and above the risk free rate of return. Secondly, the Safaricom return premiums are insignificant and that the main determinant of the equity market return premiums at the NSE is instead market characteristics. Imperatively, impressive financial performance of the technology companies as shown by their high profitability over the study period does not translate to a return premium that is significantly different from the returns of other companies quoted at the NSE. Key words: Equity market, Market premium, Shareholders, Telecommunication,Firm Performance I. Background Pandey (2005), enhancing shareholders’ wealth and profit making are among the major objectives of a firm. Shareholder’s wealth is mainly influenced by growth in sales, improvement in profit margin, capital investment decisions and capital structure decisions (Azhagaiah and Priya, 2008). Firm performance in this case can be viewed as how well a firm enhances its shareholders’ wealth and the capability of a firm to generate earnings from the capital invested by shareholders. It is therefore theoretically reasonable to expect good financial performance as reflected by profitability to affect equity securities market return premium. This is because shareholder wealth is maximized through the enhancement of the share prices of the companies targeted by the investors. Share prices are determined at equity markets commonly called stock markets. Stock markets in the world individually and collectively play a critical role in the most nations economies. The market performs a wide range of economic and political functions while offering trading, investment, speculation, hedging, and arbitrage opportunities. In addition they serve as a mechanism for price discovery and information dissemination while providing vehicles for raising finances for companies. Stock markets are used to implement privatization programs, and they often play an important role in the development of emerging economies (Banz, 1981). The determination of the market premium rate is very important for the capital market because it enables safer investment in a company and regulation of the market. This rate is the most important for the enterprise management and future investors. It is of importance for the management because it enables them to analyse the current state of the enterprise on the market and for future investors for safer investments of their capital. The equity securities market in Kenya has grown from a humble background in the 1920s (NSE, 2014). In the 1920s when Kenya was a British colony, an informal way of dealing in shares and stocks commenced. In 1951, an Estate Agent Francis Drummond established the earliest professional Stock broking firm, and impressed upon the then finance minister of Kenya Sir Ernest Vasey the idea of creating a stock exchange in East Africa. Considering the proposal, which was given by Sir Ernest Vasey and Francis Drummond, the London Stock Exchange officials approved to recognise the creation of the Nairobi Stock Exchange as an overseas stock exchange in July, 1953. In 1954, the Nairobi Stock Exchange was comprised as a voluntary organization of stockbrokers enrolled under the Societies Act. The business of shares trading was restricted only