Capital market reforms and market efficiency: case of the Nairobi Securities Exchange, Kenya
Date
2023
Authors
Owade, W.
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
The role and importance of stock markets globally and locally has led to significant efforts being put into ensuring growth of these markets. Key among these efforts include implementation of reforms within the stock markets with the aim of promoting market development. The Kenyan stock market has had several reforms implemented since the 1990s to date, however, there still remains a gap between expected market performance in comparison to the reforms that have been put in place. The objective of this study was to examine and assess market efficiency following implementation of capital market reforms at the Nairobi Securities Exchange (NSE). Specifically, the study intended to assess the stock market efficiency upon implementation of the following reforms: automated trading system reforms, Central Depository and Settlement (CDS) reforms and stock market demutualization reform at the NSE. The choice of the reforms is highly influenced by studies that have been done in the past for which results have been inconclusive or not previously researched. The underpinning theories guiding this study include the efficient capital markets theory, theory of over and under market reaction and theory of economic regulation. Empirical reviews were also done to build on existing methodologies from similar studies done previously. The study took an event study approach for each of the independent variables to determine how the markets reacted each time the particular reform was implemented. The study applied positivism given that quantitative data was analysed, and a purposive sampling technique was used to obtain data from the listed companies at the NSE. The study utilised secondary data obtained historically from the NSE. Data was analysed using Stata 14.0 and SPSS 23, and findings revealed strong positive correlation between automation reforms and market returns throughout both the short term and long-term event windows. Findings also reveal consistent significance of abnormal returns from zero, which is an indicator of market inefficiency; additionally, results reveal significant volatility across all their reforms upon implementation. In the case of CDS and demutualization reforms implementation the market was efficient as no autocorrelation was observed. However, in the case of automation reforms, there was negative autocorrelation pattern which is not consistent with efficient markets and thus in the period of automation of the NSE, the market experienced inefficiency. The findings of the study are intended to benefit various stakeholders including policy makers, sector practitioners and scholars. The study recommends that future studies consider research on reforms cutting across the East African region or comparative study with findings in local markets in comparison to more developed markets. Additionally, there is room to study more recent reforms that have been implemented in the local stock markets.
Description
Full- text thesis
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Citation
Owade, W. (2023). Capital market reforms and market efficiency: Case of the Nairobi Securities Exchange, Kenya [Strathmore University]. http://hdl.handle.net/11071/13394