An Event study on effects of Kenya’s varying application of Capital Gains Tax on stock market performance at Nairobi Securities Exchange

Abstract

Whether CGT has a positive or negative impact on liquidity and stock returns is a puzzle stock markets across the World are yet to answer. Secondly, whether to go long or short on different portfolios held by investors during events surrounding CGT is a crucial investment decision most investors struggle with. The purpose of this research therefore was to assess the stock market performance following the three most recent events surrounding CGT in Kenya (Proposal to reintroduce CGT through the Budget Speech on 12th June, 2014, Reintroduction of CGT on 1st January, 2015 and Suspension of CGT on securities listed at any exchange licensed by CMA on 11th September, 2015). Using daily stock prices, volumes traded and market index (NASI), the paper employed a 15 day event methodology to examine the reaction of stock returns to CGT before, during and after the events. Data analysis found correlation between stock returns and CGT. There were abnormal returns and cumulative abnormal returns after CGT which were insignificant. Volumes Traded was analysed using Mann – Whitney U test, the null hypothesis was rejected meaning that volumes traded was higher after CGT events. Authorised Trading Participants had varying opinions on the role of CGT on stock market performance, while almost half the respondents were in agreement that CGT affect investment decisions and hence stock returns. The majority are opined that CGT causes uncertainty, makes the market less competitive and 100% of the respondents want CGT totally abolished on gains from securities at NSE. Generally, CGT affects stock market performance though the effect is insignificant, priorities such as dividend yield, diversification, liquidity informs most investment decisions.