Foreign Capital Flows and Stock Market Capitalization at the Nairobi Securities Exchange, Kenya
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Date
2020
Authors
Osoro, Cliff
Simiyu, Eddie
Omagwa, Job
Journal Title
Journal ISSN
Volume Title
Publisher
International Knowledge Sharing Platform.
Abstract
Since the onset of financial markets liberalization in the early 1990s, the volume of capital inflows to emerging
capital markets has grown to unprecedented levels. Despite growth in capital flows, emerging capital markets are
characterized by small size and very low liquidity. In the period 2008-2018, the number of listed firms at the
Nairobi Securities Exchange increased only by twelve firms from 55 listed firms in the January 2008 to 67 listed
firms as at December 2018 giving an average annual increase of approximately one firm per year. This study
therefore sought to establish the effect of foreign capital inflows on stock market capitalization at the Nairobi
Securities Exchange, Kenya. The study adopted a causal research design and time series data for the period 2008-
2018 was analysed using correlation analysis, and the Autoregressive Distributed Lag Model. The findings from
correlation analysis indicate that foreign direct investment had a negative and significant effect on stock market
capitalization while foreign equity portfolio inflows had negative but insignificant effect on stock market
capitalization at the Nairobi Securities Exchange, Kenya. The autoregressive distributed lag test results support
the existence a significant short run positive effects of all foreign capital inflows on stock market capitalization as
evidenced by the negative and significant coefficient of the Error Correction Term (ECT). However, in the long
run foreign direct investment had a significant negative effect on stock market capitalization while the effect of
foreign equity portfolio on stock market capitalization was equally negative but insignificant in the long run. In
view of the foregoing findings, there is need for the Kenyan government to reconsider its foreign investment policy
to target only productive foreign capital inflows. Moreover, the Capital Markets Authority needs to implement
policy measures that will attract active participation of the local investors at the Nairobi Securities Exchange.
Description
A research article published in European Journal of Business and Management
Keywords
Foreign Capital Inflows, Stock Market capitalization and Nairobi Securities Exchange (NSE)
Citation
European Journal of Business and Management. Vol.12, No.26, 2020