Capital Market Reforms and Microstructure Performance of the Nairobi Securities Exchange, Kenya
Owino, Jennifer A.
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The late nineties and early 2000s was an era of extensive restructurings which saw a series of reforms taking place in most emerging markets. The Kenyan Government in a bid to match the efforts of other emerging economies embarked on revitalizing the financial sector with the aim of promoting the growth of the capital market. The huge investment in reforms aimed at improving the microstructure performance of the securities market and to consequently eliminate the problems facing the Nairobi Securities Exchange. Despite undertaking the reforms, the stock market still experiences a number of challenges such as low listing, stock prices volatility, illiquid stock market, among others. This study aimed at establishing how capital market reforms have affected the microstructure performance of the Nairobi Securities Exchange, in terms of efficiency, volatility, and liquidity, specifically to investigate the effect of entry of foreign investors, demutualization of the stock market, and dematerialization of securities on the microstructure performance of the stock market, likewise to establish the moderating effect of market size and time on the relationship between the dependent and independent variables. From existing literature, it is not clear whether undertaking reforms in the capital markets were beneficial or not. Different studies have produced mixed results with some stock markets reporting positive results and others negative. Furthermore, some of the most recently undertaken reforms in the Nairobi Securities Exchange have not been explored and therefore had to be given adequate attention. This study which employed an explanatory research design was anchored on capital market efficiency theory, market microstructure theory, liquidity and agency theories. A census of all the 63 listed companies was used. Annual Gross Domestic Product values, number of Central Depository System accounts opened, weekly closing of share prices and the market index for the period 2004-2017 were used as the data for the study. Abnormal returns, standard deviation, turnover ratio as well as market capitalization ratio were also determined. A multiple regression analysis was performed to establish how reforms have affected the microstructure performance of the securities exchange. The study found that entry of foreign investors into the Nairobi Securities Exchange did not have a significant effect on microstructure performance of the securities market. The study also established that demutualization of the Nairobi Securities Exchange influenced stock market liquidity, efficiency, and the overall market microstructure performance. However, the two measures of demutualization were found to influence the performance in opposite directions. Whereas an increase in ownership concentration improved liquidity, efficiency and the overall market microstructure of the NSE. An increase in ownership composition led to a decrease in the performance of the NSE. Dematerialization of securities achieved its desired results as it improved liquidity, volatility, efficiency as well as the overall microstructure performance of the bourse. The study also found that although the size of the market had no significant effect on the relationship between capital market reforms and microstructure performance of the Nairobi Securities Exchange the passage of time was important as it influenced the relationship between the study variables. The study therefore recommends that the Capital Market Authority should relax listing requirements to encourage more firms to be listed in Nairobi Securities Exchange as well as encourage public participation in the stock market. Additionally, since dematerialization is just a precursor to automation, the securities exchanges that are not fully automated should ensure that they go the full course to achieve the desired results