Foreign Financial Inflows and Stock Market Development at the Nairobi Securities Exchange, Kenya
Oirere, Cliff Osoro
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Despite the stock markets’ pivotal role towards economic growth, stock market development in Kenya and its contribution to economic growth is still an issue of great concern to policy makers and scholars. The Kenyan stock market is characterized by a small number of listing, lack of sophisticated infrastructure, narrow range of tradable instruments and very low liquidity. Moreover, the market is highly volatile as evidenced by high volatility in key market indicators during the period under study. Foreign investors play a significant role towards stock market development by enhancing the value of stocks and their liquidity. Hence, the study sought to establish the effect of foreign financial inflows on stock market development at the Nairobi Securities Exchange, Kenya. The Specific objectives of the study were to assess the effects of Foreign Direct Investment, Foreign Equity Portfolio, Foreign Debt Portfolio and Diaspora Remittances on stock market development at the Nairobi Securities Exchange, Kenya. The study further assessed the mediating effect of foreign investor participation on the relationship between foreign financial inflows and stock market development as well as the moderating effect of political risk on the relationship between foreign financial inflows and stock market development. The study was anchored on the Base Broadening theory, Foreign Direct Investment Dependence theory, Neoclassical Theory of Investment, Trade Off theory and the Pure Self Interest theory. The study adopted a positivism philosophy as well as causal research design methodology. The study adopted a census approach and time series data for the period 2008-2018 was obtained from Capital Markets Authority quarterly statistical bulletins, Central Bank of Kenya monthly reports, Nairobi Securities Exchange annual reports and the United Nations Conference on Trade and Development website, using a secondary data collection schedule. To ensure non-violation of the assumptions of classical linear regression, the following diagnostic tests were conducted; Normality, Heteroskedasticity, Autocorrelation, Stationarity and Multicollenearity and Model Stability test. The data was then analysed using correlation analysis, Modified Least Square Regression analysis and the Autoregressive Distributed Lag Model. The Modified Least Squares regression analysis was used in testing the direct effects of foreign financial inflows on stock market development while the autoregressive distributed lag model was used to test for existence of long run and short run cointergration with the aid of E- views 9.5 and SPSS 23 statistical software. The direct effect test indicates that diaspora remittances and foreign debt portfolio had positive and significant effect on stock market development whereas foreign direct investment had a negative and significant effect on stock market development. Foreign equity portfolio inflows however had negative but insignificant effect on stock market development at the Nairobi Securities Exchange, Kenya. The mediating effect of foreign investor participation on the relationship between foreign financial inflows and stock market development was not statistically significant. However, foreign investor participation was positive and significant as a predictor of stock market development. Political risk was not significant both as a predictor of stock market development and as a moderator in the relationship between foreign financial inflows and stock market development at the Nairobi Securities Exchange. The autoregressive distributed lag test results support the existence a significant short run positive effects of all foreign financial inflows on stock market development as evidenced by the negative and significant coefficient of the Error Correction Term (ECT). However, in the long run only diaspora remittances and foreign debt portfolio had a significant positive effect on stock market development while foreign direct investment had a significant negative effect on stock market development. The effect of foreign equity portfolio on stock market development was equally negative but insignificant in the long run. In view of the foregoing findings, the study recommends that the Kenyan government needs to devise measures that would boost foreign investor confidence and thus attract increased diaspora remittances and foreign debt portfolio investment. Additionally, the Capital Markets Authority needs to implement policy measures that will attract active participation of the local investors to invest at the Nairobi Securities Exchange. This will give the bourse more stability, liquidity and subsequently lead to increased value of stocks listed at the market.