Influence of Liquidity on Idiosyncratic Volatility of Stock Returns among Listed Firms in Kenya

Job Cheruiyot Aiyabei ,Olweny Tobias ,Irungu Macharia

doi:10.7176/rjfa/10-22-02

Abstract

Idiosyncratic volatility has not always been taken into consideration in asset pricing; this is as a result of capital asset pricing model’s proposition that idiosyncratic volatility is diversified away and market investors always hold a well-diversified portfolio. However, in reality, this does not always hold true. Studies have shown that investors do not always hold diversified portfolios and idiosyncratic risk is priced to indemnify investors for their inability to hold market portfolios, the main objective of this study was therefore to establish the effect of financial statement information on idiosyncratic volatility of stocks return among listed firms in Kenya. Idiosyncratic volatility was the dependent variable while independent variable was listed firm’s liquidity (Current ratio). The study used correlational and descriptive research design, it also used census technique which targeted all 39 listed companies that existed and their shares were actively traded at the Nairobi Securities Exchange (NSE) from the year 1998 to 2017. STATA was used to generate Descriptive and inferential statistics. The study employed a dynamic panel data regression model, the analysis of variance (ANOVA) was employed to reveal the overall model significance, the calculated F-statistic was compared with the tabulated F-statistic and a critical p-value of 0.05 was used to determine whether the overall model is significant. The study results found that there was a negative and significant relationship between liquidity and Idiosyncratic Volatility of stock returns among listed firms in Kenya (r=-0.020, p=0.000), and therefore the null hypotheses were rejected. Based on the findings, the study concluded that, liquidity has a significant relationship with Idiosyncratic Volatility of stock returns among listed firms in Kenya. The study recommends management to focus on developing financial accounting systems and processes that will result in realization of financial statements that reflect true and fair representation of the listed companies’ financial position, they should also disclose all material information that is relevant for stakeholder’s decision making. The study also recommends that the management should regularly monitor the company’s liquidity ratio as this ensures sound and informed decisions that will increase the company’s profits, drive growth and reduce Idiosyncratic risk. Keywords: Liquidity per Share, Idiosyncratic Volatility, Stock Returns, NSE & Kenya. DOI : 10.7176/RJFA/10-22-02 Publication date: November 30 th 2019

Highlights

1.1 Introduction The value relevance of published financial statement has increased significantly over the last fifteen years; this can be accredited to harmonization of accounting standards from the year 2001 as well as adoption of international financial reporting standard (IFRS) and international accounting standards (IAS) by a significant number of jurisdictions around the word. all countries with well-functioning financial market have adopted IFRS or some form of structured financial reporting that is similar to international accounting standard (Riscura, 2013)
5.1 Conclusions Based on the findings, the study concluded that liquidity has a negative and significant effect on Idiosyncratic Volatility of listed firms in the Nairobi securities exchange
Liquidity helps to ensure that a business always has a reliable supply of cash close at hand, but it is a powerful tool when it comes to determining the financial health of future investments as well

Summary

Introduction

The value relevance of published financial statement has increased significantly over the last fifteen years; this can be accredited to harmonization of accounting standards from the year 2001 as well as adoption of international financial reporting standard (IFRS) and international accounting standards (IAS) by a significant number of jurisdictions around the word. all countries with well-functioning financial market have adopted IFRS or some form of structured financial reporting that is similar to international accounting standard (Riscura, 2013). All countries with well-functioning financial market have adopted IFRS or some form of structured financial reporting that is similar to international accounting standard (Riscura, 2013). Volatility is a measure of dispersion around the mean or average return of an asset. It measures the range of an asset price about its mean level over a fixed time period (Abken and Nandi, 1996). If a stock is regarded as volatile, it is likely that it will experience a systematic variance of its mean over a given time period. A less volatile stock will have a market price that will slightly deviate over time. Idiosyncratic volatility is a risk that has little or absolutely no correlation with market risk but is specific to an asset or small group of related assets (Boloorforoosh, 2014)

Methods

Results

Conclusion