Relationship Between Asymmetric Information and Equity Returns in the Kenyan Capital Market. A Cointegration Approach

Abstract

This paper sought to investigate the cointegration relationship between asymmetric information and equity returns. Previous literature has shown asymmetric information influences Assets returns but it is less known whether there exists a long run relationship between these variables. In this regard stationarity tests and Johansen cointegration test were employed to ascertain whether there exists a long run relationship between the two variables. Data composed of monthly transaction on the 20 equities used in formulation of the NSE 20 share index over the period between Jan 2009 and up to March 2018 which formed 111 data points. The results showed that equity returns were stationary at levels using the Augmented Dickey Fuller Test, Phillip-Perron and KPSS while Asymmetric information was non-stationary at levels, but stationary at first difference. The results also showed that Asymmetric information weakly positively correlated and insignificant , r (99) = .08, p =.35 with equity returns using Pearson’s correlation coefficient. Johansen Cointegration test indicated existence of a cointegrating equation indicating a significant long run relationship between asymmetric information and equity where decrease of 0.0093% in asymmetric information is associated with an increase in equity returns in the long run and vice versa. We conclude there is a significant long run relationship between asymmetric information and equity returns. Keywords : Asymmetric information, Equity returns. DOI: 10.7176/RJFA/12-18-07 Publication date: September 30 th 2021