Foreign Financial Inflows and Stock Market Development at the Nairobi Securities Exchange, Kenya
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Date
2020-06
Authors
Oirere, Cliff Osoro
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
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.
Description
Foreign Financial Inflows and Stock Market Development at the Nairobi Securities Exchange, Kenya
Keywords
Foreign, Financial Inflows, Stock Market Development, Nairobi Securities Exchange, Kenya