Foreign Capital Flows and Stock Market Capitalization at the Nairobi Securities Exchange, Kenya

Cliff Osoro ,Eddie Simiyu ,Job Omagwa

doi:10.7176/ejbm/12-26-07

Abstract

Since the onset of financial markets liberalization in the early 1990s, the volume of capital inflows to emerging capital markets has grown to unprecedented levels. Despite growth in capital flows, emerging capital markets are characterized by small size and very low liquidity. In the period 2008-2018, the number of listed firms at the Nairobi Securities Exchange increased only by twelve firms from 55 listed firms in the January 2008 to 67 listed firms as at December 2018 giving an average annual increase of approximately one firm per year. This study therefore sought to establish the effect of foreign capital inflows on stock market capitalization at the Nairobi Securities Exchange, Kenya. The study adopted a causal research design and time series data for the period 2008-2018 was analysed using correlation analysis, and the Autoregressive Distributed Lag Model. The findings from correlation analysis indicate that foreign direct investment had a negative and significant effect on stock market capitalization while foreign equity portfolio inflows had negative but insignificant effect on stock market capitalization at the Nairobi Securities Exchange, Kenya. The autoregressive distributed lag test results support the existence a significant short run positive effects of all foreign capital inflows on stock market capitalization as evidenced by the negative and significant coefficient of the Error Correction Term (ECT). However, in the long run foreign direct investment had a significant negative effect on stock market capitalization while the effect of foreign equity portfolio on stock market capitalization was equally negative but insignificant in the long run. In view of the foregoing findings, there is need for the Kenyan government to reconsider its foreign investment policy to target only productive foreign capital inflows. Moreover, the Capital Markets Authority needs to implement policy measures that will attract active participation of the local investors at the Nairobi Securities Exchange. Keywords: Foreign Capital Inflows, Stock Market capitalization and Nairobi Securities Exchange (NSE). DOI: 10.7176/EJBM/12-26-07 Publication date: September 30 th 2020

Highlights

Introduction and BackgroundDevelopment of financial markets leads to improved quality and quantity of investments quicken the pace of economic growth and improves the living standards of the citizens (Nera & Eke, 2017)
As the markets eventually stabilize in the long run such investors often realize that they may not attain the high returns initially anticipated pull out of the market immediately leading to shocks (Koskei, 2017)
4.2 Cointergration Test Results The Autoregressive Distributed Lag (ARDL) bound test proposed by Pesaran and Shin (1999) and Pesaran et al,(2001) was applied by the study to test for the existence long run cointergration

Summary

Introduction

Introduction and BackgroundDevelopment of financial markets leads to improved quality and quantity of investments quicken the pace of economic growth and improves the living standards of the citizens (Nera & Eke, 2017). In the period 2008-2018, the number of listed firms at the Nairobi Securities Exchange (NSE) increased by twelve firms from 55 listed firms in the January 2008 to 67 listed firms as at December 2018 giving an average annual increase of approximately one firm per year (CMA, 2018). This number of listed firms is very low in comparison to other African Markets like the Nigeria Stock Market with 170 firms, Johannesburg Stock Exchange with 379 firms and the Egyptian Exchange Market with 221 firms as at December, 2018 (World Bank, 2018)

Objectives

Methods

Results