External Cash Inflows and Stock Returns of Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

Stock prices at Nairobi Securities Exchange have been decreasing for the last five years and at the same time external cash inflows, including FDI, foreign remittances, external debts and foreign grants, have been fluctuating. A decrease in stock returns has an extreme negative influence on economy as well as individuals’ consumers. Further, a collapse in the stock prices has a potential of causing widespread economic disruptions and a decrease in stock prices must always be prevented. It is therefore essential to assess the association between external cash inflows and performance of stock returns. The general objective of this study was to evaluate the effect of external cash inflows on stock returns in NSE Kenya. Specifically the study assessed the effect of foreign direct investments on stock returns of firms listed at NSE; to1establish effect of foreign remittances on stock returns of NSE-listed firms; to1assess effect of foreign grants on stock1returns of NSE-listed firms; and to establish effect of external debts on stock returns of NSE-listed firms. The study was anchored on the free cash flow theory, prospect theory and foreign direct investment theory. This study employed an explanatory research approach. Moreover, the target population was 64 companies quoted in Nairobi Securities Exchange. Since the number of companies is small, a census was conducted, which implies that all the 64 companies were included in the study. This study employed secondary time series data. The study covered duration of 12 years and was collected on annual basis from January 2008 and December 2020. Secondary data on study variables was acquired from NSE, CBK and KNBS. Data extraction checklist was employed to gather secondary data. Statistical software referred to as the Stata version 2014 was deployed to analyze data. Inferential as well as descriptive statistics was deployed to analyze quantitative data. Additionally, descriptive statistics comprised of the frequencies, percentages, mean as well as standard deviation. Moreover, inferential analysis consisted of VECM which was utilized to establish1the link between variables. The study carried out diagnostic tests which comprised of unit root test, lag order section test, normality test, autocorrelation test, Cointegration test and Granger Causality Test. The study discovered that foreign remittance has significant positive effect on stock returns in Nairobi Securities Exchange. In addition, external debts have significant positive effect on1stock returns in NSE. The study also established that foreign grants have significant inverse effect on stock returns in NSE. Also, the study discovered that FDI has significant negative1effect on the stock returns in NSE. The study recommends that Kenyan government and the policy makers ought to develop monetary and fiscal policies to regulate foreign direct investment inflows into the country. In addition, the government of Kenya should come up with policies geared towards increasing remittance. For instance, the government should come up with a policy to reduce remittance delivery time with remittances being received instantly or at least very quickly in contrast to a lag of many days earlier. Further, the government of Kenya should reduce external debts and ensure that they are within the acceptable IMF recommendations. In addition, the government of Kenya ought to ensure appropriate debt management practices are adopted so as to ensure debts are paid on time and the debt burden is reduced.