BBSF Research Projects
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- ItemViability of Equity Valuation Techniques with regard to Price Target Attainability for Nairobi Securities Exchange Companies(Strathmore University, 2014) Nzesya, Lilian Mwikali; Injeni, Geoffrey IkavuluThe purpose of this research was to establish the popular techniques that used by different firms in the valuation of shares. In line with this, the study has also sought to establish the reason behind the popularity of certain tools. The research was also aimed at finding out whether price targets formulated by actual valuation techniques are valuable. This was achieved through a series of correlation tests as well as examining of how many of the price targets were either attained or exceeded. The third objective of this research was to pinpoint some of the key challenges that analysts and investors in the market face when using these valuation tools. By highlighting the main challenges they face, the research sought to provide possible recommendations that may benefit the Capital Market Authority (CMA) in Kenya, the Nairobi Securities Exchange, investors, analysts and other stakeholders in the financial markets. The findings of the research showed that Discounted Cash flow analysis, Price/Earnings multiple, Price/Book Value are the most popular techniques with net Asset Value being the least relied upon valuation tool. With regard to price target attainability, only 50.83% of the price targets from analysts' valuation reports were attained or exceeded. This was however skewed in terms of the valuation techniques in that price targets obtained through Price Book Value had the highest percentage being met. Difficulty in establishing fore - casted cash flows and discount rate and the difficulty in using and interpreting multiples were the main challenges that face analysts in the industry.
- ItemExtent of compliance with IFRS Financial Instrument Standards - a case study of Banks in Kenya(Strathmore University, 2014-03) Ochieng', Yvonne Adhiambo; Injeni, GeoffreyThe aim of this study is to identify the extent to which listed banks in Kenya comply with International Financial Reporting Standards, with particular reference to financial instruments IAS 32, IAS 39 and IFRS 7. It also seeks to identify the formal mechanism employed to monitor and enforce IFRS compliance in Kenya. In addition, it is further intended to identify the problems listed banks encounter in complying with IFRS.The level of mandatory compliance with lAS 32, JAS 39 and IFRS 7 was measured using a mandatory disclosure index (MDI) which the researcher developed from a self-constructed compliance checklist. An open ended questionnaire was also used to gather data for the study. The sample consisted of 42 registered banks and covers the period of2012. The overall results show a high degree of compliance with lAS 32, lAS 39 and IFRS 7, though not absolute. The study reveals the existence of a monitoring and enforcement mechanism which the researcher finds to be not too rigorous. Finally, the study identifies the number of regulatory requirement registered banks had to comply with in addition to the IFRS requirements, the ever changing IFRS, and the inability of the banks to automate the IFRS into their system to make it easier and faster for financial statement preparation, as some of the major challenges that registered banks go through in complying with the IFRS.
- ItemAn evaluation of individual pension funds in Kenya, the factors that affect their growth and the opportunities they have.(Strathmore University, 2014-03) Ndindi, Wambua ChristineOne of the sectors in the economy that has been involved in mobilization of the savings is the Pension fund industry. The role of savings in economic growth has been given considerable attention given the fact that for any sustainable growth and development, resources must be effectively mobilized and allocated efficiently so as to achieve the growth objectives. The general objective for this study was to evaluate individual pension funds. The specific objectives were:-To establish the factors that affect the growth of pension funds in Kenya, to find out the impact of the mentioned factors on the growth of pension funds and to identify the opportunities that pension funds in Kenya have to encourage their growth. Literature was reviewed of the famous scholars in the Pension world. Such inc1uded John Campbell a professor of Economics at the Harvard University who has done research on financial literacy and conducted that financial illiteracy leads to consumers not maximizing on their welfare. Robert Holzoman, emphasis on the need of IPPs investing in long-term Infrastructure bonds and using derivatives such as swaps to mitigate against certain risks such as interest rate risk Jeffry Cannichael, a World Bank researcher concludes that transparency is the factor that has greater impact on the growth of IPPs. A questionnaire was administered to the twenty eight Individual Pension Plans in Kenya and twenty two pension plans responded. The data was regressed in Microsoft Excel to find out if those factors do have any effect on the growth of IPPs. A p-value of 0.01554 showed that there was strong evidence to signify that a relationship did exist between the factors suggested from the Literature and the growth of IPPs. In addition to the questionnaire an analysis of the annual reports of the specific Individual Plans was done to determine the number of schemes they have invested in. It was clear from the views of the respondents that liquidity has the highest impact on growth of IPPs. From the findings,45% of the respondents stated that liquidity was the factor that impacted the growth of IPPs,32% of the respondents said it was regulation and 14% said it was administration.
- ItemReturn volatility and the pricing of equities at the Nairobi Securities Exchange(Strathmore University, 2014-03-12) Chege, Eric TheuriUsing the monthly return series between 1999 and 2013 I find evidence that volatility is priced on the Nairobi Securities Exchange. The GARCH-M model yields positive and significant ARCH and GARCH parameters and the shocks of equity returns to conditional volatility are highly persistent. We find that the conditional variance is driven by the past conditional variance to a greater degree than by new disturbances. The E-GARCH model gives similar results with some marginal improvement indicating that asymmetry does not affect the relationship between risk and return. A possible explanation for these findings would be that if the future seems risky, investors may want to save more in the present thus not requiring a large risk premium. Portfolio managers may find the results of this study useful when carrying out a forward-looking valuation of a well-diversified portfolio of Kenyan stocks, as well as other similar stocks, based on market characteristics.
- ItemThe viability of long term care insurance in Kenya(Strathmore University, 2014-11) Wanja, Njau LilianKenya's population aged 60 and above is rapidly ageing. The available facilities catered towards meeting the health care needs of Kenya's ageing population are inadequate and may not be able to manage this growing population.2 additionally, the public facilities available have only the basic outpatient and inpatient facilities which are not sufficient to accommodate the health needs of the population aged 60 and above. On the other hand, the private facilities available in Kenya cover these needs by providing nursing care as well as residential care. However these facilities prove to be overly expensive and can cause a financial burden on the party taking out these services. This research assesses Long Term Care Insurance as an affordable solution to providing the needed health care services for Kenya's ageing population as well as considers the viability of such a scheme in Kenya. This has been done by determining the factors that affect the sustainability of such a product in the Kenyan market. Besides this, an appropriate contribution rate for a suitable LTC! Policy was determined. This was done by using the Markov process through the multi-state model in the pricing of the scheme. This research shows that a long term care insurance scheme is sustainable in Kenya as it can be both affordable and comprehensive in terms of what the benefits can afford the policyholder. Different contribution rates were established for males and females due to their different inherent risk set and needs.
- ItemCommodity diversification: How Kenya can exploit commodities for diversification.(Strathmore University, 2015) Kuhunya, Lisa WangariInvestment in commodities dates back to the age of barter trade and has continually evolved to form an investmentwith substantial diversification benefits to investors · {Vrugt, Bauer, Steenkamp, & Molenaar, 2004). Commodity markets have become an attractive investment, as they offer returns not easily accessible through the traditional equity and bond investments {Schneeweis, Karavas, & Georgiev, Updated 2002). Defining characteristics of the return on commodity investment include relatively high performance and low volatility as opposed to those of equities and bonds. Inclusion of these commodities in an equity or fixed income portfolio would therefore be important to improve the risk adjusted return of the latter portfolios.
- ItemThe trading volume - stock returns dynamic: a case study of the NSE(Strathmore University, 2015) Muheria, Grace WalthiraThis paper exammes the contemporaneous and dynamic relationships between stock returns and trading volume for the Kenyan Stock Market. The sample under stud y was the stocks constituting the NSE-20 index for a period extending from September, 1997 through to March, 2014. After time trend tests and unit-root tests to ensure stat ionarity of data , the empirical methods employed include bivariate simultaneous equat ions regression analysis and Granger causality tests to examine the. contemporaneous and causal relationships respectively. There was evidence to SUPP011 existence of a contemporaneous relationship between stock returns and trading volume with most stocks exhibiting a positive relationship. There was no evidence to support the causal relationship between stock returns and trading volume for most stocks. Out of20 stocks, 4 of them indicated that return causes volume, 4 stocks indicated that volume causes return and I stock indicated bi-directional causation. This implie s that forecast s of one of the variables (return or volume) cannot be impro ved by knowledge of the other for many of the Nairobi Securities Exchange counters. More could be done to asse ss the economic significance of the statistical predictability detected in this study for the 8 stocks and as a result make conclusions about market efficiency.
- ItemStock price behavior in the NSE- a test of the predictability and seasonality of stock prices movements(Strathmore University, 2015) MURIITHI, JEAN MUTHONIThis study incorporates a_ predictive regression approach and a centered moving average analysis to test the predictability and seasonality respectively of the stocks on the Nairobi Securities Exchange (NSE) 20 Share Index. The findings reveal that most of the stock prices do not exhibit seasonality with the exception of a few such as Kenya Power, Centum, Bamburi which exhibit repetitive cycles. The t-test of significance portrays the shortcomings of the past stock prices in predicting future stock prices with Sasini showing the closest element of predictability (t-test value of 0.000290608) which is still very low.
- ItemEffects of interim dividend announcement on the value of a firm - a case of the Nairobi Securities Exchange(Strathmore University, 2015-11) Jepkoech, Kipkoskei PurityThis research focuses on the impact of interim dividend announcement on the value of a firm. The purpose of this research is to empirically investigate whether the magnitude of stock market reactions to interim dividend is greater than final dividend announcements for companies listed under the Nairobi Securities Exchange 20-Share Index. Out of the 20 companies in the Index, 7 companies paid interim dividends under the period of study. The event study methodology was employed to analyze effects of both dividend announcements. The findings of this research show that the reaction by market participants to final dividend announcements in the Kenyan stock market is stronger than interim dividend announcements. This contradicts previous research that indicate interim dividend announcements lead to a stronger market reaction. The limitation of this study is small simple size due to the limited number of companies that pay interim dividends. The findings of this research will be useful to dividend policy makers of publicly traded companies that pay interim dividends and investors with vested interest in publicly traded companies for proper decision making. The study's originality stems from the fact that it focuses on the effects of Both interim and final dividend announcement on Kenyan stocks.
- ItemDividend yield strategy in the Nairobi Securities Exchange(Strathmore University, 2015-11) Mwangi, Archibald MachariaThis study aims to test the viability of dividend yield investing as an alternative investment strategy to exploit observed overreactions in the• market. The study adopts the Dogs of the Dow investment strategy that entails a buy and hold strategy of the highest dividend yielding stocks in the market. A back-testing approach is adopted from the period 2006 to 2015. The findings from this analysis show that there appears to be limited effectiveness of the DDS portfolio in beating the market or generating abnormal returns. As such, the study concludes that the Dogs of the Dow is not viable as an alternative investment strategy. The study further posits that any observations to the contrary may be as a result of data mining as was proposed by Fischer Black (1993).
- ItemThe relationship between executive renumeration and credit risk of banks listed in Kenya(Strathmore University, 2015-11) Kinyanjui, Brenda WangechiThe collapse of the financial system in 2008 brought into light the strong impact that executive remuneration had in the management of credit risk in banks is the United States. The relationship of agency looks at executive pay as a mode of linking the interests of shareholders to that of management. This study attempts to reveal the relationship between the measures of credit risk and executive remuneration and give an overall assessment of the impact of executive remuneration on credit risk in Kenyan banks. It will enable shareholders be able to know to what extent they can use executive remuneration to control credit risk in banks. It can also be used by the government to ensure proper credit risk management in banks for the sound health of the financial system. A panel data from eleven listed commercial banks in Kenya covering a seven year period (2008-2014) was analyzed within the random effects framework. The results from this study find a positive but insignificant relationship between credit risk and executive remuneration. The study can be extended to include the structure of executive remuneration especially with the introduction of a derivatives market in Kenya and the possibility of the inclusion of share options in the pay structure of management.
- ItemUnderpricing of initial public offerings at the Nairobi Securities Exchange between 1994 and 2014(Strathmore University, 2015-11) Mumbo, Jane ValaryUnder pricing of initial Public Offerings is characterized by the closing price being higher than the offer price on the first day of trading. Research carried out in different financial markets has generated varied results with regard to the degree of under pricing present in the markets and its determinants. This study examines the extent of under pricing for listings on the Nairobi Securities Exchange between 1994 and 2014.The study establishes that IPOs on the Nairobi Securities Exchange are significantly under priced by approximately 46.28%firm specific and offer specific factors such the size of the offer, size of the firm, age of firm and the subscription rate of the offer are significant explanatory factors for the observed under pricing, with subscription rate being the most significant. The results are robust for varied binary regression model specifications.
- ItemEffect of exchange rate volatility on foreign direct investment - the case of Kenya(Strathmore University, 2015-11) Waweru, WanumaThe purpose of this research study was to examine the effect of exchange rate volatility on foreign direct investment (FDI) in a developing nation with the focus being Kenya. Time series data ranging from 1993-2013 were used with ARCH and GARCH models being utilized to determine the •volatility of tl1e exchange rate. The study showed that the volatility of the exchange rate has a negative impact on FDI and that the liberalization of the economy has not really contributed to greater FDI inflows to the country. Also revealed in the study was that stock FDI and political stability are likely to draw in more funds from foreign investors and that contrary to commonly held thought, per capita GDP does not really feature as a determinant in a foreign investor's decision process when deciding whether or not to invest in the Kenyan market.
- ItemStock market overreaction and the size effect - evidence from the Nairobi Securities Exchange(Strathmore University, 2015-11) Abdulrahman, HusseinInvestors have traditionally been viewed as economically rational individuals who make decisions based on all available information. More recent studies propose that investors are irrational and systematically overreact to good and bad information events. Several anomalies have been identified that deviate from rational behavior, which offer opportunities to make abnormal returns. This paper tests for the overreaction phenomenon, a market anomaly previously presented by De Bandt and Thaler (1985,1987) whereby past losers significantly outperform past winners following overreaction to extreme earnings by investors. The test examines the movement of returns of stocks listed on the Nairobi Securities Exchange over 36 months subsequent to extreme earning years. The test involved forming two portfolios, one of extreme good performers and the other of extreme poor performers during the base year. Performance of these portfolios was analyzed from the year of portfolio formation for 5 overlapping sample periods. As a control, the paper also examines whether the difference between losers and winners is actually a size effect as proposed by Zarowin {1989). Portfolios were formed based on firm size and their performance was analyzed for 36 months subsequent to portfolio formation over 5 overlapping sample periods. The results are however not consistent with either proposition. There was no statistically significant difference between the two portfolios in each case, and therefore the findings do not support both investor overreaction to earnings and the size effect in the NSE.
- ItemImpact of gender diversity in boards on firm value - a study on Kenyan and Egyptian listed companies(Strathmore University, 2015-11) Kabicho, Pricilla NgaruroThe purpose of this paper is to determine ( 1) whether there is any relationship between gender diversification in boards of listed companies and the firm value and (2) if the relationship varies across industries. Data from two countries, Kenya and Egypt, is used over a pe1iod of five years, 2010-2014. The two countries are chosen because of their difference in culture that allows one country to have more women on the boards compared to the other. In this case Kenya has more female representation in boards compared to Egypt. Panel data techniques are used to establish the relationship between gender diversity in boards and firm value. In Kenya gender diversity in boards is found to have a negative impact on fi1m value. However, industry specific results vary as the relationship is found to be negative in the banking industry, positive in the construction industry and no relationship is found in the commercial services industry.
- ItemInformation content impact of stock splits - a case of the Kenyan market(Strathmore University, 2015-11) Ikonya, BrownStock splits from their definition are seen as purely cosmetic events that is, they should have no effect on the returns of the shares in question. However, studies have found numerous stock market effects associated with this event. This paper examines the effects of this event for the Kenyan Stock market. This research employed the event study methodology by Fama, Fischer et al (1969) and Brown and Warner ( 1980) using the stock split announcements of seven NSE listed companies that occurred during the year 2006 to 2012 and contribute further evidence as to the efficiency characteristics of the Kenyan stock market. The abnormal returns that arise due to this event are calculated using the Market Model and the significance is tested using t-tests. The results oft- tests on the average abnormal return (AAR) indicated that abnormal returns were significantly different from zero which implied that there is an anomaly with regards to stock split announcements regarded as news by NSE investors. The study established that there is a relationship between stock split announcement and performance of share prices of listed companies in the Nairobi Securities Exchange (NSE) in Kenya.
- ItemThe interest rate pass-through from the Central Bank Rate to Microfinance Banks' lending rates in Kenya(Strathmore University, 2015-11) Mumbi, Njoroge DorcasThis paper investigates the significance of the interest rate pass-through from monetary policy rates to microfinance lending rates in Kenya. This methodology makes use of the Vector Auto regression Model, using annual data from a sample of 6 micro finance institutions from the year 2000 to 2015. This study finds that the degree of interest rate pass-through is insignificant and that it takes a considerable period of time before the policy rates can be fully reflected in the long term microfinance lending rates. The Impulse response and Variance Decomposition models also indicate that the relationship between the Central Bank Rate and the Microfinance Bank lending rates was insignificant. This study is novel as it is one of the first attempts to consider the effectiveness of monetary policy in the Kenyan microfinance sector, hence providing policy makers with additional insights to the effectiveness of monetary policy in the microfinance sector.
- ItemModelling the impact of oil prices on stock prices in Kenya(Strathmore University, 2015-12) Mwangi, MianoThe purpose of the study is to model the impact of oil prices on stock prices in Kenya using monthly data for between 2003 and 2015. The study uses the Johansen's multivariate cointegration test and the vector error correction model (VECM). The Johansen's cointegration test shows that the variables are cointegrated with at most one cointegrating vector and the cointegration estimate reveals that oil prices have a significant relationship with stock prices in the long-run in Kenya. The VECM model reveals that in the short-run, oil prices have a significant influence on stock prices. Similarly, in the long-run, the study finds that oil prices have a negative effect on stock prices in Kenya. To address the impact of oil price shocks on stock prices, the study uses impulse response and variance decomposition analysis. The impulse response results show that oil price shocks cause an immediate decline in stock prices. On the other hand, the cumulative effects of oil price shocks account for 9.02% of the variation in stock prices in the long-run. The study recommends policymakers, financial analysts and shareholders to take into consideration the effects of oil prices in their financial decisions given the significant impact of oil prices on stock prices in Kenya.
- ItemTesting trade - off theory vs pecking order theory - evidence from Kenyan listed firms(Strathmore University, 2015-12) Ruto, Kelvin KibetThis study seeks to test both the pecking order theory and the trade-off theory theories using evidence from companies listed in the Nairobi securities exchange and examine which theory best explains capital structures of listed firms in Kenya. This research follows an investigative research design as it seeks to test the application of pecking order theory vs the trade-off theory is the context of listed firms in Kenya. Through random sampling, 30 listed companies were randomly selected for study representing 50% of the listed companies in Kenya. Listed firms are found to make a considerable adjustment towards the optimal debt ratio. However, there was an average negative speed of adjustment suggesting that some listed firms they are moving further away from the optimal debt ratio. Based on the sampled listed companies, using the LSDVC dynamic estimator as method of estimation, this study has clearly shown that the listed firms make an adjustment of their actual debt towards the optimal level of debt and age of the firms contribute to increase firm debt. More profitable and older companies have tended to use the pecking order theory. Limitations and disadvantages faced in this study is the fact that it only focused on determinants of general debt. Debt can be separated as long term and short term debt and may imply different levels of adjustment. Therefore recommend future studies and research to analyze how these determinants of debt may affect long term debt and short term and if there is difference in their adjustment rates
- ItemStock returns and trading volumes - the case of the Nairobi Securities Exchange(Strathmore University, 2015-12) Opaka, Waka RodgerThis study examines the causal and contemporaneous relationship between stock returns and trading volumes at the Nairobi Securities Exchange. The study makes use of panel data from 44 NSE-listed stocks over the period running from July 2009 to February 2014. Analysis of data is done by use of the Granger and Sims test for causality as well as estimating a contemporaneous relationship equation. The findings indicate an unambiguous causal relationship between stock returns and trading volumes, running from the former to the latter. It is also found that trading volumes do not make the market move. These results, therefore, imply that incorporating trading volume information in investment or stock purchase and sales decisions adds little value to investors' portfolios.