BBSF Research Projects (2016)

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Dividend yield strategy in the Nairobi Securities Exchange
(Strathmore University, 2015-11) Mwangi, Archibald Macharia
This 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).
Effect of capital structure on financial performance: the case of banks listed on the Nairobi securities exchange.
(Strathmore University, 2016) Onyango, Allen Alexander
This paper seeks to examine the relationship between capital structure and bank perfonnance in Kenya. This study has employed the use of panel data techniques to analyze the relationship between capital structure and bank performance. The performance variables used in the study were retum on asset (ROA), Retum on equity (ROE) and net interest margin (NIM). The results from Levin-Lin-Chu and Im-pesaran-shin unit root test show that all the variables were stationary in levels. The study hypothesized negative relationship between capital structure and bank performance, The results also indicate that capital structure does not detennine bank performance but rather it is performance that determines banks capital structure.
Effect of exchange rate volatility on foreign direct investment - the case of Kenya
(Strathmore University, 2015-11) Waweru, Wanuma
The 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.
Effects of interim dividend announcement on the value of a firm
(Strathmore University, 2016) Kipkosgei, Purity J
This 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 reaction. The limitation of this study is small sample size due to the limited number of companies that pay interim dividends. The findings of this research will be useful to 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 stock.
The Impact of exchange rates and inflation rate on the marketed returns to suppliers in the Kenyan tea industry
(Strathmore University, 2016) Kurui, Joy Chepngetich
Tea production and processing is a focal sector in the Kenyan agricultural sector with its' being the largest foreign exchange earner in the sector and thus a key contributor to the country's GDP. The tea sector is also a key employer with 150,000 Kenyans employed and a key income source with over 600,000 farmers. The Agriculture sector performed well from independence accounting for 40% of GDP in 1963. Its significance in the economy has been declining over time accounting for 27.3% of the country's GDP in the year 2014 (KNBS, 2015) however despite the decline in significance, the sector remains the leading contributor ofGDP in Kenya. Tea was the second leading export commodity earner of the country contributing 20.4% of total export value in 2014 (KNBS, 2015). Kenya is the largest exporter of tea by volume producing 32% of the world's tea exports volume in 2014 (Statista, 2015) and (Andae, 2015).
Impact of gender diversity in boards on firm value - a study on Kenyan and Egyptian listed companies
(Strathmore University, 2015-11) Kabicho, Pricilla Ngaruro
The 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.
Information content impact of stock splits - a case of the Kenyan market
(Strathmore University, 2015-11) Ikonya, Brown
Stock 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.
Institutions and economic growth: Kenya, 1963 - 2014
(Strathmore University, 2016) Murugi, Mbelu K
This paper examines the existence of a relationship between political institutions and economic growth in Kenya. Through empirical analysis, carried out for the period between 1963-2014, the study aims to use the findings to improve and develop the policy in this area. The variables under scrutiny in this paper are GDP, political rights and civil liberties. Univariate and multivariate time series analysis are used to examine the relationship. The univariate time series helps to evaluate stationarity of the variables. The study finds that all three variables are non-stationary in the level unit root test. The multivariate time series examines the long run and short run relationships. The Engle-Granger test showed no cointegration between the variables. After subjecting the variables to a Johansen test, cointegration was found to exist indicating two cointegrating equations. This proves that indeed a long run relationship exists among the variables. Granger Causality tests reveal that political rights Granger Cause GDP at the 5% significance level. However, at the 10% level there was some significant causality from civil liberties to GDP and civil liberties to political rights.
The interest rate pass-through from the Central Bank Rate to Microfinance Banks' lending rates in Kenya
(Strathmore University, 2015-11) Mumbi, Njoroge Dorcas
This 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.
Modelling temperature derivatives using Levy processes
(Strathmore University, 2015-12) Wambugu, Martin
Weather derivatives are a new risk manage tool which can be widely used in the financial market to avoid the impact of bad weather effects and control the weather risks (Wang et al, 2015). weather derivatives are different from traditional financial derivatives as their underlying asset such as temperature, humidity and precipitation, which cannot be traded in the market, so ordinary pricing models such as black scholes formula is not applicable in pricing weather derivatives. the underlying commodity results into one considering the incomplete markets theory when modelling the temperature data.
Modelling the impact of oil prices on stock prices in Kenya
(Strathmore University, 2015-12) Mwangi, Miano
The 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.
The relationship between executive remuneration and credit risk of banks listed in Kenya
(Strathmore University, 2016) Kinyanjui, Brenda W.
The 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 inbanks. 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.
The relationship between executive renumeration and credit risk of banks listed in Kenya
(Strathmore University, 2015-11) Kinyanjui, Brenda Wangechi
The 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.
Stock market overreaction and the size effect - evidence from the Nairobi Securities Exchange
(Strathmore University, 2015-11) Abdulrahman, Hussein
Investors 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.
Stock returns and trading volumes - the case of the Nairobi Securities Exchange
(Strathmore University, 2015-12) Opaka, Waka Rodger
This 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.

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