The Effect of internet subscriptions on capital market participation by local individual investors in Kenya

Abstract

This study examines the effect of internet subscriptions on capital market participation by local individual investors in Kenya, focusing on stocks and corporate bonds. Using quarterly data from 2010 to 2023, the research employs an Autoregressive Distributed Lag (ARDL) model to analyze the relationship, accounting for macroeconomic factors such as inflation, interest rates, and market performance. Results show that internet subscriptions positively influence stock market participation though the effect is lagged, with an increase in subscriptions leading to a statistically significant higher number of stock investors. Bond participation also has a positive statistically significant effect from internet access in the short run and this effect is immediate then becomes negative when lagged unlike in the case of stock market participation. Macroeconomic variables reveal mixed effects; inflation and interest rates negatively impact stock participation, while their influence on bonds remains statistically insignificant. The Bounds Test confirms a long-term relationship between internet subscriptions and stock market participation but yields inconclusive results for bonds. Diagnostic tests ensure the robustness of findings, with adjustments made for heteroskedasticity in the bond model. The study highlights the transformative role of internet access in democratizing financial markets for stocks. However, low bond participation underscores the need for targeted interventions, such as improved product availability and financial literacy initiatives. The research suggests expanding internet infrastructure, particularly in underserved regions, and fostering financial and digital literacy to boost market participation. Future studies should explore government bonds and behavioral factors influencing investment decisions in the context of internet access. These findings provide critical insights for policymakers and stakeholders aiming to enhance financial inclusion and market development in Kenya.