Macro Risk Factors, Investor Sentiments and Performance of Equity Market at Nairobi Securities Exchange, Kenya
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Date
2021
Authors
Makau, Musembi Michael
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The equity market is envisioned as a significant source of financing for both the corporate sector and government aimed at growing Kenya’s gross domestic product by 10 percent annually as per Kenya’s vision 2030. However, despite ongoing capital market reforms on corporate governance and conduct of business; Kenya’s equity market remains constrained by absence of new listings. In addition, the equity market suffers from high concentration risks whereby top five companies control 70 percent of total market capitalization. This exposes the market to financial contagion effects. Furthermore, the performance of equity market has declined significantly during the period under study with investors loosing an average of KSH.20 billion in 2009, KSH.299 billion in 2011, KSH.262 billion in 2015 and KSH.461 billion in 2018 in market capitalization decline caused by fluctuations in macro risk factors leading to investor wealth decline, loss of investor confidence, low equity market activity and limited investment opportunities. On average, the exchange’s contribution to economic growth was lower than one percent against a ten percent target by government’s vision 2030. The key aim of the study was to establish the effect of macro risk factors and Investor sentiments on performance of equity market at Nairobi Securities Exchange, Kenya. Specifically, the study determined the effect of foreign equity flows; the effect of domestic savings; the effect of private sector credit; the effect of Inflation rate and the effect of Investor sentiments on performance of equity market in Nairobi Securities Exchange, Kenya and examined moderating effect of institutional ownership on macro risk factors and Investor sentiments on Performance of equity market. The study was based on the capital asset pricing model, fisher’s hypothesis, arbitrage-pricing theory, behavioral finance theories (prospect theory and herding theory) and efficient market hypothesis. The study relied on positivism paradigm and explanatory research design. The study relied on monthly secondary data obtained from Central bank of Kenya, Nairobi Securities Exchange, Capital Markets Authority of Kenya and Kenya National Bureau of Statistics between 2008 and 2018. The target population was all 67 listed firms in Nairobi securities exchange as captured by the Nairobi Securities Exchange All Share Index. The instruments of data collection were document review guides. The study used Auto regressive distributed lag model and Nonlinear Auto regressive distributed lag model for data analysis. The findings of the study indicate negative significant relationship between foreign equity flows (β=0.034, p=0.05), domestic savings (β=0.003, p=0.05), Inflation rate (β=0.007, p=0.05) and performance of equity market. Furthermore, the study also reported significant positive relationship between private sector credit (β=0.000, p=0.05), and Investor sentiments (β=0.000, p=0.05) and performance of equity market. In addition, institutional ownership (β=0.000, p=0.05) significantly moderated the relationship between macro risk factors, Investor sentiments and performance of equity market. The findings underscored the importance of the central bank in monitoring Inflation rate and implementing appropriate monetary policies aimed at reducing the high cost of inputs to create a favorable environment for firms to thrive and make profits to increase equity market performance. Since private sector credit positively affects equity market performance, the central bank should reduce the central bank rate so that commercial banks can lend more to private sector. The capital markets authority to work towards reduced taxes and transactions charges to attract foreign equity flows while monitoring changes in Investor sentiments in the market as it significantly affects performance of equity market. The significant institutional ownership-moderating role was emphasized as corporate governance increases investor confidence in the market and ensures firm managers invest in projects that maximize shareholder value.
Description
A Thesis Submitted to the School of Business in Partial Fulfilment of Requirements for the Award of the Degree of Doctor of Philosophy in Business (Finance) Kenyatta University, June 2021
Keywords
Macro Risk Factors, Investor Sentiments, Performance, Equity Market, Nairobi Securities Exchange, Kenya