An Evaluation of the Relationship Between/Market Turnover and /Securities Prices in Emerging Markets / Ininairobi Securities Exchange

AN EVALUATION OF THE RELATIONSHIP BETWEEN/MARKET TURNOVER AND /SECURITIES PRICES IN EMERGING MARKETS / ININAIROBI SECURITIES EXCHANGE

KAGURE, GRACE WANGECHI

UNITED STATES INTERNATIONAL UNIVERSITY

SUMMER 2012 \ EVALUATION OF THE RELATIONSHIP BETWEEN MARKET TURNOVER AND SECURITIES PRICES IN EMERGING MARKETS IN NAIROBI SECURITIES

EXCHANGl

^ BY

KAGURE, GRACE IWANGECHI

A Project Report submitted to the Chandaria School of Business in Partial fulfillment of the requirement for the degree of Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY

USIU-A

600000070916

SUMMER 2012 DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any other college, institution or university other than the United States International University in

Nairobi for academic credit.

Signed:, Date: [O hv^, Qo)2.

KAGURE GRACE (ID 609500)

This project has been presented for examination with my approval as the appointed supervisor

Signed: ' X / \ / Date:

MR. KEPHA OYARO

Dean, Chandaria School of business

Signed: Date: Z-j/c'S^/^n,

Deputy Vice Chancellor, Academic Affairs

i COPYRIGHT

No part of this project report may be reproduced in any form or by any means, or stored in a

database or retrieval system, without prior permission of the author.

ii ABSTRACT

The investors play significant roles in determining movements in prices and the rate of turnover in the stock market and its capitalization. There is a long run relationship between stock market liquidity and economic growth, also the relationship between sentiment and capital market liquidity has been established. A stock market with high degree of turnover or high turnover ratio measured by value of transactions as a percentage of market capitalization is said to be highly liquid. While turnover ratio measures the rate at which stock are bought and sold, liquidity measures the rate at which agents can convert stocks into purchasing power. This happens to all stock markets especially the emerging markets in securities exchange. This study aimed at establishing the relationship between the market turnover and the securities prices in emerging markets focusing on Nairobi Securities Exchange. This was studied in a review of the past trend in regard to the variables identifiable in the phenomenon.

The research was guided by a number of study objectives namely; To evaluate the relationship between market turnover and securities prices in emerging markets in Nairobi securities; To determine whether market turnover affects the stock prices volatility of firms quoted in NSE.; To evaluate the trend of price indices of the Nairobi securities exchange and to establish the relationship between sales turnover and the prices of the securities in Nairobi stock market.

The study utilized secondary data collected from the NSE performance trend for the period between 2007 to 2011.This period was appropriate since this was the time when the market turnover would be influenced by the factors such the political stability of the country and the financial crisis that had recently influenced the performance of most financial institutions in

Kenya and the entire globe.The study focused on NSE performance as measured using the

NASI share index on a monthly basis for the study period.

The study found that the market turnover and the securities prices were positively related.

When the market turnover increases the prices of the securities also increases. On the effect of the market turnover on the prices of the securities, the study established that market turnover influenced the prices of the securities. When the turnover shoots up, this effect

iii caused the prices of the securities to assume an increasing trend. The market turnover

exhibited a non-constant trend. There was a high market turnover in June 2008 and 2009 than the rest of the periods.

The study recommends that management focus on making their firms profits stable to win the investors confidence. Proper mechanism be put in place to win the confidence of the investors by providing timely and accurate financial reports. Bank managers should also employ a multivariate debt control mechanism so as to prevent insolvency problems which drive away investors leading to low security prices.

The study findings will be of great help and assistance to the policy formulators in matters relating to securities investment and Capital Market Authority in regulating the transactions of the securities in Nairobi stock Market. It will equip investors with adequate information on the performance of the securities in future and thus allow them make right decisions when doing investments.

iv ACKNOWLEDGEMENT

My acknowledgement first goes to the almighty God who has given me the strength to go through the research

Secondly, I feel indebted and wish to pass my gratitude to my supervisor Mr. Kepha Oyaro for his valuable encouragement, patience, advice and proper guidance throughout the research proposal.

I acknowledge the effort of my research assistant who assisted in the collection of data at

NSE.

I also thank my sweetheart Sam for support and encouragement and my children Olive and

Ryan for their patience throughout my MBA program.

Lastly, to all USIU fraternity for their encouragement and especially my friends Florence and

Victor for their effort, support and encouragement during my stay in USIU.

V DEDICATION

I dedicate this proposal to my beloved family; my husband, daughter, son, mum, brother and sisters and my Uncle Joel for your support.

vi TABLE OF CONTENT

DECLARATION i

ABSTRACT iii

ACKNOWLEDGEMENT v

DEDICATION vi

TABLE OF CONTENT vii

LIST OF TABLES x

LIST OF FIGURES xi

LIST OF ABREVIATIONS xii

CHAPTER ONE 1

1.0 INTRODUCTION 1

1.1 Background of the Problem 1

1.2 Statement of the Problem 4

1.3 Research Objectives 5

1.4 Specific Objectives 5

1.5 Importance of the Study 6

1.6 Scope and Limitation of the Study 6

1.7 Definition of Terms 6

1.8 Chapter Summary 7

CHAPTER TWO 8

2.0 LITERATURE REVIEW 8

2.1 Introduction 8

2.2 Relationship between Price of Shares and Market Turnover 8

vii 2.3 To Determine whether Market Turnover Affects the Stock Prices Volatility of Firms Quoted in NSE 13

2.4 The Trend of the Price Indices and Market Volatility in Stock Market 17

2.5 Chapter Summary 23

CHAPTER THREE 25

3.0 RESEARCH METHODOLOGY 25

3.1 Introduction 25

3.2 Research Design 25

3.3 Target Population and Sampling Frame 25

3.4 Data Collection Method 26

3.5 Research Procedure 26

3.6 Data Analysis 27

3.7 Chapter Summary 28

CHAPTER FOUR 29

4.0 RESULTS AND FINDINGS 29

4.0 Introduction 29

4.1 Sampled Firms Information 29

4.2 Relationship between Market Turnover and the Securities Prices 32

4.3 Whether Market Turnover Affects the Stock Prices Volatility of Firms Quoted in NSE: Regression analysis 38

4.4 The Trend of Price Indices of the Nairobi Securities Exchange 39

4.5 Chapter Summary 42

CHAPTER FIVE 43

5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS 43

5.1 Introduction 43

5.2 Summary 43

viil 5.3 Discussion 44

5.4 Conclusion 47

5.5 Recommendations 48

REFERENCES 50

APPENDICES 56

Appendix I: Cover Letter 56

Appendix II: Field Research Guide 57

Appendix III: Secondary Data Collection Template 58

Appendix IV: Sampled Firms per Sector 59

Appendix V: List of Companies Listed in the Nairobi Stock Exchange 60

ix LIST OF TABLES

Table 1 Percentage Representation of Firms per Sector 29 Table 2 Market Capitalization and Issued shares of the Firms Selected in the Sample 30 Table 3 Top 10 Companies by Market Capitalization at the NSE (end of 2011) 31

Table 4 Top 10 Companies by Equity Turnover (2011) 32

Table 5 Correlational Relationship between Share Prices and Sales Volume 34

Table 6 The Effect of Sales Volume on the Stock Prices 38

X LIST OF FIGURES

Figure 4.1: Relationship between Market Turnover and the Securities Prices 33 Figure 4.2: Relationship between Equity Turnover and the Securities Prices 34

Figure 4.3: Equity Turnover of the Companies Quoted in NSE 35

Figure 4.4: Trend of Market Turnover of the Firms Quoted in NSE 36

Figure 4.5: Trend of NSE 20-Share Index 39 Figure 4.6: Trend of NSE Price Index against Market Capitalization 40

xi LIST OF ABREVIATIONS

NSE - Nairobi Securities Excliange

GDP - Gross Domestic Product

GEE - Central and Eastern Europe

IFC - International Finance Corporation

UNDP - United Nations Development Programme

WEE - World Federation of Exchange

SPSS - Statistical Package for Social Sciences

xii CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Problem

Emerging stock markets have been identified as being at least partially segmented fi-om global capital markets. Consequently, it has been argued that local risk factors rather than world risk factors are the primary source of equity return variation in these markets. Haugen

(2001) cited that if the market is efficient, today's stock price should already reflect all the information about future earnings and dividends that is both relevant to the valuation of the stock and "knowable." By knowable we mean all information that has been announced and can be predicted based on past announcements. The only information not reflected in the stock price is that which has not been received and cannot be predicted. Research in emerging stock markets has suggested a number of empirical characteristics that international investors should be aware of

There is a growing body of evidence that emerging market securifies tend to offer larger returns with higher volatility compared to developed stock markets (De Santis &

Improhoroglu, 1997). In addition, they show greater evidence of predictability (Harvey,

1995) and lower correlation with developed stock market securities implying significant risk diversification opportunities for international portfolios. Although it is also argued that the behavior of emerging markets is affected to a greater extent by local polifical, economic and social events rather than global events (Aggarwal, Inclan, & Leal, 1999), More recent evidence has suggested that the diversification benefits of these markets have started to diminish because of changes in investment barriers for international investors (Errunza,

Hogan, «fe Hung, 1999)

There is a vast amount of empirical evidence that fatter tails relative to the normal distribution characterizes the empirical distribution of asset returns. This empirical fact appears to be more pronounced in emerging than in developed markets possible due to liquidity problems, speculative attacks and other inefficiencies (Bekaeart, Harvey, & Lumsdaine, 2002) which effectively increase the chances of large price movements.

1 Although these large price movements have almost zero probabilities of occurring according to the normal distribution, they tend to occur more often than the normal distribution would suggest sometimes with devastating consequences; for example, the stock market crash of October 1987. Unsurprisingly, investment managers and bankers have a keen interest in large price movements because these can erode the performance and value of an investment. The occurrence of extremes can also dramatically reduce the benefits of risk diversification because it is very difficult to diversify away the risk associated with extreme price movements since during a market crash all assets become highly correlated.

Financial regulators like the Bank for International Settlements also have a keen interest in the chance of large financial losses. This is because large financial losses can endanger the stability of the financial system. For that reason, financial institutions must keep aside capital to cover any potential losses in the market place. The level of these capital requirements should be high enough to protect a financial institution and the financial system against the likelihood of large losses due to a rare but catastrophic event. In relation to the African emerging markets, the probability of occurrence of extremes can also have a large impact on economic development because stock markets are the main sources of finance for local businesses (Tolikas,2011)

In Kenya, dealing in stocks and shares started in the 1920s when the country was still under British colony. There was however no formal market, no rules and no regulations to govern stock brokerage activities. Trading took place on gentlemen's agreement in which standard commissions were charged with clients being obligated to honor their contractual agreements of making good delivery and settling relevant costs. In 1951, an Estate Agent by the name of Francis Drummond established the first professional stockbroker firm and other stock brokerage firms were later established. The NSE came into being in 1954 when trading used to take place over a cup of tea at the New Stanley Hotel (Muga, 2004).

The Nairobi Securities Exchange was constituted as a voluntary association of stock brokers registered under the societies Act in 1954 and in 1991 the Nairobi Securities Exchange was incorporated under the companies Act of Kenya as a company limited by

2 guarantee and without a share capital. Subsequent development of the market has seen an increase in the number of stockbrokers, introduction of investment banks, establishment of custodial institutions and credit rating agencies and the number of listed companies have increased over time. Securities traded include, equities, bonds and preference shares

(www.nse.co.ke).

The relationship between the turnover and prices of securities can be analyzed well using the market indices. First, stock indices measure the general economy performance. It is unusual for a stock market to be rising sharply if the economy is in a recession. Interestingly, stock indices measure investors' expectations regarding the future performance of the economy, while statistics like the GDP measure the past performance. Second, indices are useful as a benchmark for gauging the performance of investment managers. Furthermore, stock mutual fund managers are typically evaluated against some index. Third, indices serve as a guide for passively managed mutual funds. That is, an investor who wanted to match the performance of the securities could invest in a mutual fund that mimics the securities. Fourth, indices are used by investment analysts to assess the overall direction of the market. Fifth, indices are used to estimate statistical parameters such as market beta. Finally, indices are used as underlying securities in various derivative securities like futures and options (Levy & Post,

2005).

Normally various indices differ in three major aspects: first which securities are included in the index, and how many, secondly how the index is adjusted over time for changes in securities (such as takeover's and mergers), and finally which method is used to calculate the index (Levy & Post, 2005). Indices can generally be categorized as price-weighted, value- weighted or equally weighted indices. The difference depends on how much significance or weight is given to each security. The price-weighted index weighs its component securities according to their market price, whereas the value-weighted index weighs its component securities by their equity market value. The equally weighted indices weight each security equally (Levy & Post, 2005). There are several indices in Nairobi stock exchange. All indices have been adjusted for the free-float figures of all companies (Davani, 2004)

3 Recent years have witnessed a phenomenal growth in the volume of investment funds which have flowed into emerging markets; these increased flows to emerging stock markets appear to have been stimulated by the reported opportunities for higher returns and reduced portfolio risk (Errunza, Hogan, & Hung, 1999) One of the regions where emerging markets have seen the largest amount of growth is Central and Eastern Europe (CEE); stock markets in Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, the Slovak Republic, Slovenia and the Ukraine have experienced large gains and sizeable increases in both the number of securities traded as well as market capitalization.

1.2 Statement of the Problem

Sentiment of the investors play significant roles in determining movements in prices and the rate of turnover in the stock market and of course its capitalization (Ogunmuyiwa, 2002).

According to (Ogunmuyiwa, 2002) several studies have proved the long run relationship between stock market liquidity and economic growth, a lot others have equally established a relationship between sentiment and capital market liquidity. A stock market with high degree of turnover or high turnover ratio measured by value of transactions as a percentage of market capitalization is said to be highly liquid (White & Mala, 2006).While turnover ratio measures the rate at which stock are bought and sold, liquidity measures the rate at which agents can convert stocks into purchasing power.

According to Karpoff (1987), there are three reasons why the price-volume relationship is important. First, it provides insight into the structure of financial markets. Empirical relations between prices and volume can help discriminate between differing hypotheses about market structure. Second, the price-volume relation is essential for event studies that use a combination of price and volume data from which to draw inferences. Third, the price- volume relation is critical to the debate over the empirical distribution of speculative prices. Knowledge of the price-volume relation can then be used in event studies to measure changes in the variance of the securities traded.

4 Past studies have not shown the thin line disparity between turnover and security prices For

instance; Musa Al-Faki (2006) opines that stock market liquidity is also denoted by the turnover ratio of the market. In the words of Baker & Stein, (2004), they suggest that turnover or more generally, liquidity can serve as sentiment index; thus representing measures of investor's sentiment. Levine (1997) did a study on liquidity of the stock market securities on ease and speed with which capital market agents can convert assets into purchasing power at agreed prices.

In Kenya, there has been scanty research done on the securities and how they relate to the market turnover. For example, Kipsang (2003) did a study on assessment of factors influencing investment decisions in securities markets: a case of Nairobi stock exchange. Kawega (2004) did a study on stock price prediction at the

Nairobi Stock Exchange while Ndungu (2005) explored Systematic risk and un-systematic risk on financial firms quoted on the Nairobi Securities Exchange. None of the above studies has dealt on the relationship between market turnover and securities prices. Therefore, there exists scarcity of information on the effect of the turn over on the prices of Nairobi securities.

This study therefore was motivated by the need to establish the relationship between market turnover and securities prices in Nairobi Securities Exchange.

1.3 Research Objectives

The main purpose of this study was to evaluate the relationship between market turnover and securities prices in emerging markets in Nairobi Securities Exchange (NSE).

1.4 Specific Objectives

1.4.1 To evaluate the relationship between market turnover and securities prices of firms quoted at NSE.

1.4.2 To determine whether market turnover affects the stock prices volatility of firms quoted in NSE.

1.4.3 To evaluate the trend of price indices of the Nairobi Securities Exchange.

5 1.5 Importance of the Study

The findings of this study will go along way in providing helpful information to the following stakeholders.

1.5.1 Policy Makers

The findings of this study will be of great importance to the policy formulators in matters relating to securities investment and Capital Market Authority in regulafing the transactions of the securities in Nairobi stock Market.

1.5.2 Investors

The findings will provide an insight of the relationship between the prices of the securities and the changes turnover. This will equip them with adequate information on the performance of the securities in future.

1.5.3 Researchers and Scholars,

The findings of this study will be of great help to them, as they will have a platform upon which other related studies can be done to reveal more on the subject.

1.6 Scope and Limitation of the Study

This study covered the data from securities in the Nairobi stock exchange. It also limited to the prices of Nairobi stock market securities. The conclusions of this study will be based on the data collected from the year 2007 to 2011.

1.7 Definition of Terms

1.7.1 Market Turnover

This the percentage of outstanding shares traded during a period of fime (Jones, 2007).

1.7.2 Dividend

Dividend is any direct payment by a corporation to the shareholders; it may be paid in form of cash or in form of stock (Ross, Westerfield, & Jaffe, 2001).

6 1.7.3 Emerging Markets

Emerging markets are broadly defined as nations in the process of rapid growth and industrialization. Often times, these nations are transitioning to an open market economy with a growing working age population (Agarwal & Mohtadi, 2004).

1.7.4 Securities

These are any financial instruments traded on a stock exchange such as shares and bonds (Gough, 2001).

1.7.5 Capital Markets

This is the market for long-term securities for example stocks. It encompasses fixed income and equity securities with maturities greater than one year (Reilly & Brown, 2006).

1.8 Chapter Summary

This first chapter has presented the main objective of the project, which evaluates the relationship between market turnover and securities price in the emerging markets, the strength of the relationship and what direction the two moves. The chapter has put forward the background and the research problem as well which, is summed up by the admission that this area has attracted research mainly in the developed world but that there is no conclusion on the subject matter we are seeking to unravel. The chapter concludes that this study is intended to add to this debate while presenting a position for the Nairobi securities exchange for policy makers, investors and researchers.

Chapter two will highlight some of the theories that relate market turnover and securities prices and their relafionships. The chapters will extensive review literature on the securities prices, securities indices, theoretical prepositions and empirical literature on the securities indices and the turnover rate in the past. This wealthy background of literature will be useful in understanding the relationship of the two variables of the study.

7 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter looked into the theoretical literature related to factors of security pricing and market turnovers. The chapter will also examine empirical studies that have been done on this field. A conclusion of the factors would bring about the relationship between the phenomena of the study will be included and conceptualized.

2.2 Relationship between Price of Shares and Market Turnover

2.2.1 Economic Theory on Stock Prices

Most of researches in this area have attempted to theoretically, model and/or empirically determine a contemporaneous relationship between the price change and volume ((Smirlock

& Starks, 1988). One of the central findings of the literature is a positive relationship between the absolute value of price change and transacfion volume (Smirlock & Starks,

1985). Smirlock & Starks (1988) found that average firm behavior indicates a significant lagged relationship between price change and volume and that this relationship tends to be more significant in short periods immediately preceding and immediately following quarterly earnings announcement. These results indicate that information arrival to investors tends to follow a sequential rather than simultaneous process. Even Karpoff (1987) believed that most theoretical models are unable to explain price volume relations, Epps (2006) attempted to describe and explain this relationship. Epps' model assumes that both the price change and volume are caused by the arrival of new information (Epps & Epps, 2006).

Smirlock & Starks (1988) used causality tests to examine the stock price-volume relationship and found no causality relationship. Rogalski (1978) used same methodology with Smirlock & Starks (1988) and found that stock price changes and the level of volume contemporaneously cause each other. Osborne (1959) attempted to model the stock price change as a diffusion process with variance dependent on the number of transactions and imply a positive correlation between volume and price change. Ying (1966) found that volume and price change are positively correlated, and a large increase in volume is usually

8 accompanied by either a large rise in price or a large fall in price. Ying was the first to document both price-volume correlations in the same data set (Karpoff, 1987).

As Haugen (2001) pointed out an efficient market exhibits certain behavioral traits or characteristics. The behavior of the real market examines to see if it conforms to these characteristics. If it does not, the market is inefficient. Economic theory suggests that under competition, the rate of return on investments tends towards equality across industries. Since entrepreneurs will seek to exit unprofitable operations and enter other more profitable industries, profitability is mean reverting within as well as across industries. Given the mean- reversion of the profitability, changes in the profitability and earnings of a firm are predictable to certain extent.

Stock prices are influenced not only by dividends and future expectafions for the issuing company's performance but also by macroeconomic variables. Traditional study tells us that an interest rate increase (or decrease) usually induces the decline (or increase) of stock prices. However, empirical studies have produced various results as menfioned above. For example, when economic recovery is too strong, the effect of rising interest rates on stock prices is limited. In the case of interest rates in foreign countries, the influence on domestic stock prices is complicated. Usually, rising foreign interest rates induce a decrease in that country's stock prices, and as a result, domestic stock prices decrease. However, there is some possibility that depreciation of domestic currency by high foreign interest rates may increase domestic stock prices. It is difficult to determine whether changes in the exchange rate produce a positive or negative effect. We can say clearly, however, in an export-oriented country, that depreciation of the currency increases exports as well as stock prices. In analyzing recent stock price fluctuations, exchange rate movements seem to be an inevitable factor to consider because large volumes of capital move every day not only for trade but also for capital investment.

Theories that try to explain the momentum effect can broadly be categorized as risk based or rational theories and non-risk-based or behavioral theories. Hong & Stein (1999) present behavioral models that explain the momentum effect by cognitive biases in the way investors' process information, which leads to time-series predictability of stock returns. In

9 contrast, Conrad and Kaul (1998) argue that expected stock returns are constant over time. They show that momentum strategies buy stocks with high average mean returns and sell stocks with low average mean returns. They demonstrate that these differences reflect cross- sectional variations in expected returns and thus, risk.

Recently, empirical and theoretical papers have analyzed the relation between the momentum effect and measures of trading volume such as turnover. They find that turnover predicts the magnitude and persistence of momentum profits over long horizons. In contrast, Nagel

(2000) argues that turnover has no special role in predicting long-horizon momentum returns.

He finds that turnover is correlated with book-to-market.

2.2.2 Weekend Effect

Numerous studies attempt to explain the weekend effect by examining various types of measurement errors: the delay between trading and settlements in stocks and clearing checks; specialist-related biases; the disfinction between trading and non-trading periods; the timing of corporate and government news releases; and time zone differences between relevant countries and markets (Gibbons & Hess, 1981), (Keim & Stambaugh, 1984), (Rogalski,

1984), (Jaffe & Westerfield, 1985) and (Fortune, 1991). The weekend effect is characterized by returns on Mondays being systematically lower than the returns for other days of the week. Fortune (1991) provides a plausible explanafion of the weekend effect. He suggests that firms and governments release good news during market trading, when they are readily absorbed, and store up bad news after the close on Friday, when investors cannot react until the Monday opening. Another reason suggested for the Monday effect is the measurement error in the portfolio returns. According to Keim & Stambaugh (1989), if the low Monday returns are even partially due to the posifive errors in prices on Friday and if these errors vary over time, then higher than average returns on Monday occur. According to Keim (1984), the weekend effect may also be related to systemic movements within the bid-ask spread.

Malambo & Biekpe (2006) examine the day-of-the-week effect for 17 indexes in nine African equity markets. Their results show that the day-of-the-week effect was present in only 13 markets. Basher and Sadorsky (2006) investigate the day-of-the-week effect in 21

10 emerging stock markets. Their results show that while the day-of-the-week effect is not present in the majority of emerging stock markets studied, some do exhibit strong day-of-the- week effects even after accounting for conditional market risk.

2.2.3 Theory of Random Walks

For many years economists. Statisticians, and teachers of finance have been interested in developing and testing models of stock price behavior. One important model that has evolved from this research is the theory of random walks. This theory casts serious doubt on many other methods for describing and predicting stock price behavior — methods that have considerable popularity outside the academic world. For example, random walk theory is an accurate description of reality, then the various "technical" or "chartist" procedures for predicting stock prices are completely without value (Alexander, 1961).

Random walk theorists usually start from the premise that the major security exchanges are good examples of "efficient" markets. An "efficient" market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants (Fama, Fischer, Jensen, & Roll, 2009). In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in fime the actual price of a security will be a good estimate of its intrinsic value.

Now in an uncertain world the intrinsic value of a security can never be determined exactly. Thus, there is always room for disagreement among market participants concerning just what the intrinsic value of an individual security is, and such disagreement will give rise to discrepancies between actual prices and intrinsic values. In an efficient market, however, the actions of the many competing participants should cause the actual price of a security to wander randomly about its intrinsic value. If the discrepancies between actual prices and intrinsic values are systematic rather than random in nature, then knowledge of this should

11 help intelligent market participants to better predict the path by which actual prices will move towards intrinsic values (Fama, 2005).

When the many intelligent traders attempt to take advantage of this knowledge, however, they will tend to neutralize such systematic behavior in price series. Although uncertainty concerning intrinsic values will remain, actual prices of securities will wander randomly about their intrinsic values. Of course, intrinsic values can themselves change across time as a result of new information. The new information may involve such things as the success of a current research and development project, a change in management, a tariff imposed on the industry's product by a foreign country, an increase in industrial production or any other actual or anticipated change in a factor which is likely to affect the company's prospects.

In an efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected "instantaneously" in actual prices (Fisher &

Lorie, 1964). In fact, however, because there is vagueness or uncertainty surrounding new information, "instantaneous adjustment" really have two implications. First, actual prices will initially over adjust to changes in intrinsic values as often as they will under adjust. Second, the lag in the complete adjustment of actual prices to successive new intrinsic values will itself be an independent, random variable with the adjustment of actual prices sometimes preceding the occurrence of the event which is the basis of the change in intrinsic values (i.e., when the event is anticipated by the market before it actually occurs) and sometimes following.

This means that the "instantaneous adjustment" property of an efficient market implies that successive price changes in individual securities will be independent. A market where successive price changes in individual securities are independent is, by definition, a random walk market. Most simply the theory of random walks implies that a series of stock price changes has no memory—the history of the series cannot be used to predict the future in any meaningful way. The future path of the price level of a security is no more predictable than the path of a series of cumulated random numbers. It is unlikely that the random walk hypothesis provides an exact description of the behavior of stock market prices. For practical purposes, however, the model may be acceptable even though it does not fit the facts exactly.

12 Thus although successive price changes may not be strictly independent, the actual amount of dependence may be so small as to be unimportant (Fama E., 2010).

What should be classified as unimportant depends, of course, on the question at hand. For the stock market trader or investor the criterion is obvious: The independence assumption of the random walk model is valid as long as knowledge of the past behavior of the series of price changes cannot be used to increase expected gains. More specifically, if successive price changes for a given security are independent, there is no problem in timing purchases and sales of that security. This implies that, for investment purposes, the independence assumption of the random walk model is an adequate description of reality as long as the actual degree of dependence in series of price changes is not sufficient to make the expected profits of any more "sophisticated" mechanical trading rule or chartist technique greater than the expected profits under a naive buy-and-hold policy.

2.3 To Determine whether Market Turnover Affects the Stock Prices Volatility of Firms Quoted in NSE.

Stock markets are more than a place to trade securities; they operate as a facilitator between savers and users of capital by means of pooling of funds, sharing risk, and transferring wealth. Stock markets are essential for economic growth as they insure the flow of resources to the most productive investment opportunities. Stock prices change in stock markets on a daily basis. Moreover, during certain times of the year, it is easy to notice that stock prices appreciate every morning, and this may take place many times in one day for some stocks.

This means that stock prices are determined by supply and demand forces (Molodovsky &

Nicholas, 1995).

In studies on stock-price volatility, volume is usually considered to play an important role in affecting price volatility. There are many empirical investigadons of the relation between stock-return volatility and volume that have found a significant positive correlation between the volatility and volume. Schwert (1989) and Gallant, Rossi, & Tauchen(1992), for example, document the posifive volatility-volume relation for both individual securifies and portfolios in mature markets. Recently, in Chen & Song, (2000) volatility-volume relation

13 was confirmed. Some theoretical models have also been proposed to explain why the empirical link between price volatility and volume appears to be so strong - for example, the mixture of distributions models Clark(1973). The mixture of distributions hypothesis (MDH) posits that price volatility and trading volume are both subordinated to the same information arrival rate or "news" process.

There is no foolproof system that indicates the exact movement of stock prices. However, the factors behind increases or decreases in the demand and/or supply of a particular stock could include company fundamentals, external factors, and market behavior. Company fundamental factors influencing stock prices might include performance of the company, a change in board of directors, appointment of new management, and the creation of new assets, dividends, earnings, etc. External factors might include government rules and regulations, inflation, and other economic conditions, investor behavior, market conditions, money supply, competition, uncontrolled natural or environmental circumstances directly affecting the production of the company, strikes, etc. Moreover, the behavior of market participants could be an important influencing factor of stock price (Molodovsky & Nicholas,

1995).

Molodovsky & Nicholas (1995) discussed dividends as the hard core of stock value. The importance of dividends was originally emphasized in the work of Williams (1938). He states that the value of any asset equals the present value of all cash flows of the asset. As far as the effect of inflation and interest rate on stock price is concerned, an increase in expected inflation rate is likely to lead to economic tightening policies that would have negative effect upon stock prices according to Maysami, Ramin, Koh, & Tiong (2000). Additionally, in the cash flow valuation model, a rise in the rate of inflation increases the nominal risk free rate and raises the discount rate. According to DeFina (1991), the cash flows do not rise at the same rate as inflation, and the rise in discount rate leads to lower stock prices.

On the other hand, changes in both short-term and long-term interest rates are expected to affect the discount rate in the same direction via their effect on the nominal risk-free rate as

Mukherjee & Naka (1995) point out. Further, an increase in the rate of interest raises the

14 opportunity cost of holding cash and is likely to lead to a substitution effect between stocks

and other interest bearing securities (Maysami, Ramin, Koh, & Tiong, 2000).

2.3.1 The Role of Information Technology

In their study, Grossmann & Stiglitz,(1980)showed that the only way for informed market actors to get an additional return due to their situation is when the take their new positions as better informed actors compared with uninformed actors. If the hypothesis of Fama (2010) regarding efficient markets is true and actors have to pay for information, informed actors are not getting any additional return if they are better informed. The authors' further show that if the hypothesis of efficient markets is true and information has a cost, competitional markets collapse. If this situation occurs, every informed market actor should realize that he/she is not willing to pay for additional information and then he/she will manage on the market with the same result as uninformed actors. Researchers are aware of the situation that free information is a satisfactory restraint for efficient markets (Fama E. , 2010), but Grossmann and Stiglitz

(1980) show that free information is a compulsory restraint for efficiency. Because information has a cost, stock prices cannot reflect the total available information. Those actors who are paying for information are, according to the efficient market hypothesis, not getting any compensation for being better informed. This is a fundamental conflict situation between how efficiently the market spreads information and the incitements to acquire information.

A study by Fargher & Weigand (1998) showed that the development of information technology has had a positive effect on the stock prices linked to the acquired new information in small- and medium-sized companies. As a result, this has increased the information efficiencies in these companies. This development in technology has placed great responsibility on listed companies to provide their investors and future investors with accurate information so that their future capital needs are secured. "Investor relations" is a concept that relates to how well a company is communicating with the market and its actors.

15 Coyne & Witter (2002) introduced a new way of managing investor relations - investor-

based finance (IBF). This model can support a company in creating a picture of their

investors' buying and selling behaviors and their customers' buying behavior. The IBF model

can also guide the company to identify their most important investors and acquire

information about their financial behavior. With this framework, the company can adjust its

communication between itself and its investors, so that the different investor groups get the

information they require, need, use and read.

Fama, Fischer, Jensen, & Roll (2009) first developed the method of event studies. In these event studies, the changes in a stock price caused by new public information are measured.

The method has been applied to a great extent to study the effects on stock prices caused by different events, such as the publication of result reports, dividend announcements,

information about share splits, and changes in accounting standards (Lane & Jacobson,

1995). The method has the limitation that it ignores the content of information: it only confirms that new information has reached the market and caused movements in stock prices

in a defined fime surrounding the point in fime of publicafion.

As trading volume in the market increases, one would expect more information to be available in the market that, in turn, would improve market transparency and reduce uncertainty and market volatility. In other words, when market breadth and depth is smaller, informed traders can drive bid-ask spreads high. As is the case in emerging markets with their embryonic insider trading laws, informed traders can lead to considerable losses on the part of market makers. Therefore, in markets where a cluster of traders might have superior information relative to the specialists or market makers, the incentive to market making is reduced and will lead to high spreads to avoid losing money to informed traders. Because there is a well established literature on the inverse relationship between volume and spreads, it makes sense that without the arrival of new information (expected volume) to all market traders, trading is going to decrease and large shifts in prices might occur at the same time (through speculation on the part of informed traders and the resulting increase of spreads on the part of market makers). Thus, in less efficient trading systems, trading volume is expected to drop (but prices can still shift dramatically), implying a negative relationship between volume and volatility of returns (Tauchen & Pitts, 1983).

16 Investors and future investors are expected to value the share price of a company according to available public financial informafion. The explanation for this could be the fime of the disclosure of information, as annual statements are published at a point in fime when the market has already incorporated the information in the form of press releases and/or quarterly statements in the stock prices. The information in articles, press releases and quarterly financial statements is immediate information, and this information is of major interest to investors.

Researchers who defend the efficient market hypothesis claim that the market quickly adapts to and reflects the new information. Therefore, they mean that there are no abnormal returns, i.e. "returns that differ from what other market actors, facing the same risk, earn" (Hamberg,

2004). Researchers in behavioral finance are trying to prove that human beings learn slowly, and that our decisions are influenced by conscious or unconscious biases and the existence of abnormal returns on the market (Thaler, 1999).

2.4 The Trend of the Price Indices and Market Volatility in Stock Market

It is important to understand the effects of a changing trading system on stock price discovery as they may show local policy makers how to design better systems in the future.

As Pagano & Roell (1993) point out, trading systems differ in the speed of disseminafion of order flow information. The finance literature on stock market volatility has shown that the time series of market returns is not drawn from a single probability distribution but rather from a mixture of conditional distributions with varying degrees of efficiency in generating the expected returns. The autoregressive "mixing variable" is considered to be the rate at which information arrives at the market, and explains the presence of GARCH effects in daily stock price movements. Assuming trading volume as a proxy for this "mixing variable", several studies have provided empirical evidence on this positive linkage. For example, Tauchen & Pitts (1983) suggest that, in liquid or mature markets, where the number of traders is large, the relationship between trading volume and volafility of price change should be positive.

17 Tauchen & Pitts (1983) have also described the possibility of a negative relationship between volume and volatility of stock returns. The authors suggest that both volatility and trading volume are determined by new information flow rates to the market, traders' response to new information arrival, and the number of active traders. As a result, in thinly traded and highly volatile markets, infrequent trading can cause prices to deviate substantially from fundamentals. An increase in the number of traders and speculative trading activity will realign prices with fundamentals, leading to more efficient prices and lower volatility. As a result we may expect to observe that, in thinner markets, variance would decrease with an increase in trades and prices adjusted through speculative trading. Indeed, in many younger markets, transactions are made through a broker, based on negotiations between parties. If the official price reporting mechanism is weak, brokers gather and process information from market sources regarding transactions that have taken place in that market; this information is then passed on to a trader (buyer or seller) (Tauchen & Pitts, 1983).

A common problem plaguing the low and slow growth of small developing economies is the swallow financial sector. Financial markets play an important role in the process of economic growth and development by facilitating savings and channeling funds from savers to investors. While there have been numerous attempts to develop the financial sector, small island economies are also facing the problem of high volatility in numerous fronts including volatility of its financial sector. Volatility may impair the smooth functioning of the financial system and adversely affect economic performance. Similarly, stock market volatility also has a number of negative implications. One of the ways in which it affects the economy is through its effect on consumer spending (Poterba, 2000).

The impact of stock market volatility on consumer spending is related via the wealth effect. Increased wealth will drive up consumer spending. However, a fall in stock market will weaken consumer confidence and thus drive down consumer spending. Stock market volatility may also affect business investment (Zuliu, 1995) and economic growth directly (Levine & Zervos, 1996). A rise in stock market volatility can be interpreted as a rise in risk of equity investment and thus a shift of funds to less risky assets. This move could lead to a rise in cost of funds to firms and thus new firms might bear this effect as investors will turn to purchase of stock in larger, well known firms. While there is a general consensus on what

18 constitutes stock market volatility and, to a lesser extent, on how to measure it, there is far less agreement on the causes of changes in stock market volatility. Some economists see the causes of volatility in the arrival of new, unanticipated information that alters expected returns on a stock (Engle, 1982). Thus, changes in market volatility would merely reflect changes in the local or global economic environment. Others claim that volatility is caused mainly by changes in trading volume, practices or patterns, which in turn are driven by factors such as modifications in macroeconomic policies, shifts in investor tolerance of risk and increased uncertainty. The degree of stock market volatility can help forecasters predict the path of an economy's growth and the structure of volatility can imply that" investors now need to hold more stocks in their portfolio to achieve diversification" (Krainer, 2002). This case is more serious for small developing economies who are attempting to deepen their financial sector by developing their stock markets.

2.4.1 African Stock Markets

The behavior of the African stock markets has been examined in a number of studies. Ayadi,

(1998) found no evidence of the "turn of the year" calendar anomaly in the Nigerian stock market while Mecagni & Sourial (1999) discovered significant inefficiencies in the Egyptian stock market over the period 1994-1997. In a more recent study. Smith & Jefferis (2005) also examined market efficiency in the African stock markets during the period 1990-2001 and found that the South African stock market was weak form efficient for the whole period while the Egyptian and Moroccan stock market had become weak form efficient from 1999.

By contrast, the Nigerian stock market had only become efficient from early 2001. Similar results were reached by Okeahalam & Jefferis (1999) who discovered that the South African stock market was weak form efficient through the period studied.

More recently, Jefferis & Smith (2005) examined whether market efficiency changes over the period 1990-2001. They confirmed that the South African stock market is weak form efficient throughout the period examined and they found that the stock markets in Egypt, Morocco and Nigeria are becoming weak form efficient towards the end of this time. Smith, Jefferis, & Ryoo(2002) examined the random walk hypothesis in the eight largest African

19 stock markets and documented supportive evidence only for the Johannesburg stock exchange. Ghysels & Cherkaoui (2003) examined the Moroccan stock market and found that the high level of transaction costs and lack of transparency do not support the emergence of the stock market. Recently, Lagoarde-Segot & Lucey (2008) assessed the weak form efficiency hypothesis in the Middle East and North African stock markets, including Egypt and Morocco, and found different levels of efficiency among the countries considered; factors such as market depth and corporate governance could explain the different degrees of efficiencies uncovered.

Although most of the studies involving African stock markets focus on the question of market, efficiency there is a part of the literature that examined the behavior of return and volatility. Roux & Gilbertson,(1978) examined the return behavior in the Johannesburg stock exchange and found significant deviations from normality. They also found that the empirical distribution of returns in the Johannesburg stock exchange is more leptokurtic than its New

York stock exchange counterpart, which implies greater preponderance of extreme returns in the tails of the empirical distribution. Brooks, Davidson, & Faff (1997) found that the

Johannesburg stock market volatility behavior was closer to that of developed markets and concluded that it had become more integrated into the international financial system. Smith

& Jefferis (2005) reported that the weekly returns in the South African, Egyptian, Moroccan and Nigerian stock markets significantly deviate from normality and that the tails of the empirical distribution is fatter than the normal distribution; these findings imply significantly higher probabilities for large price movements than implied by the normal distribution.

Bekaert and Harvey (1997),Claessens, Dasgupta, & Glen 1995) and Harvey (1995) found that volatility in Nigeria tends to be much higher than developed countries and that it is influenced more by local factors. Overall, it appears that it is the presence of large price movements that leads to the non-normality and high volatility of returns in the African stock markets.

The NSE is an example of an emerging stock market that has been characterized by humble beginnings yet has grown considerably over time. It stands out as an average stock market with great potential for growth, one that is making considerable effort to be a more significant driver of economy in Kenya and the East African Region. In 1994, the NSE was

20 rated by the International Finance Corporation (IFC) as the best performing emerging market in the world with a return of 179% in dollar terms. In the past years (2003 - 2010), it has experienced robust activity and high returns on investment (Schmidt-Hebbal, Serven, & Solimano, 1996). It accounts for over 90% of market activity in the East African region and is a reference point in terms of setting standards for the other markets in the region. As an emerging capital market, it has faced challenges to its development and growth such as economic depression and political uncertainty, among others.

NSE facilitates the mobilization of capital for development and provides savers in Kenya with an alternative saving tool. Funds that would otherwise have been consumed or deposited in bank accounts are redirected to promote growth in various sectors of the economy as people invest in securities. Economic growth is promoted through improved efficiency in mobilization (Schmidt- Hebbal, 1996) of savings as capital is allocated to investments that bring the most value to the economy (Capital Markets Authority,2005)Long-term savings are, therefore, mobilized for financing long term ventures through competitive pricing mechanisms.

NSE provides enterprises with a non-bank source of financing through the sale of shares to the public. It provides not only the substitution but also diversification of risk to entrepreneurs as they raise capital through equity (Wagacha,2001). The government and local authorities use the NSE as an alternative source of funds to increasing taxes in order to finance development projects. Through the issue of bonds to the public, funds are raised for different types of projects. As an instrument of privatization, the Exchange has provided an avenue of liberalization of sectors previously dominated by the government and facilitated public divesture of its shares in public enterprises such as the Kenya Airways, Mumias Sugar Company, Kenya Commercial Bank, among others.

NSE encourages the broader ownership of firms. The opportunity accorded the general public to have ownership rights over listed enterprises helps to reduce large income inequalities through the sharing of profits made by these enterprises, thereby facilitating the redistribution of wealth. The Exchange facilitates improved corporate governance. Public companies tend to have better management records than private companies because of the improvement of management standards and efficiency to meet the demands of shareholders and the NSE under its corporate governance rules.

21 Investors are accorded the opportunity to buy the number of securities that are affordable to them, thereby facilitating the small investor's source of extra income. This is in contrast to other means of investments that require large capital outlays that are not within the reach of small investors be they individuals or institutions. The activity in the market serves as a 'barometer' for the performance of the economy. The movement of shares is an indicator of the general trend in the economy because share prices tend to rise or be stable when the economy and the relevant companies are stable and growing.

2.4.2 Emerging Stock Markets in Africa

For more than the last three decades, there has been a substantial increase in the number of stock markets in Africa. With only eight active stock markets in 1980, the number of stock markets in Africa increased to 18 by the end of 2002 (UNDP , 2003). By last year 2011, there were 26 stock markets in Africa, and there are proposals to open new stock markets in Congo

D.R., Equatorial Guinea, Ethiopia, the Gambia, Lesotho, Madagascar, Mauritania and Sierra

Leone (Moin, 2007). Kenny and Moss (1998) suggest that this phenomenal growth in stock markets in Africa can be attributed to the financial sector reforms undertaken by African countries. Levine (1997) argues that well-developed stock markets promote higher economic growth through their ability to attract international investments and mobilize domestic savings.

The development and efficiency of the African stock markets can therefore be expected to have a major impact on the future economic growth of the African economies. However, despite the rapid increase in the number of stock exchanges, stock markets in Africa (with the exception of South Africa) remain rather underdeveloped compared to their counterparts in developed and other emerging markets. First, they are small in size. The total value of

African stocks, excluding those traded in South Africa, was in 2007 only 0.62 per cent of global stock market capitalization and 1.55 per cent of all emerging markets stocks (World

Federation of Exchange (WFE, 2008). Second, the stock markets are also small in relation to their own economies. For example, stock market capitalization in Mozambique is only 3.20 per cent of gross domestic product (GDP), while Nigeria, Uganda and Tunisia's stock market capitalizations are between 25 and 52 per cent of GDP (WFE, 2008). Crucially, they remain extremely thinly traded and illiquid (Mlambo & Biekpe, 2005). This severely affects their

22 informational efficiencies. However, the ability of African stock markets to operate effectively depends on their level of informational efficiency (Smith, Jefferis, & Ryoo,

2002). This raises a crucial policy question as to whether African stock markets can improve their informational efficiency by integrating their operations.

With the increasing importance of emerging African markets, both in terms of size and number, the need for reliable evidence on their informational efficiencies is particularly important. First, unlike their developed counterparts, African countries have fledgling economies in which market efficiency still has significant developmental implications.

Second, African stock markets, with the exception of South Africa, have low correlations with global stock markets (Moin, 2007). This offers portfolio diversification opportunities for international investors. This study seeks to establish these global correlations especially in

Africa using NSE in Kenya as the scope of the study.

2.5 Chapter Summary

Stock prices change in stock markets on a daily basis thus the market turnover. This is driven by the forces of demand and supply at a given time. The performance of the company, a change in board of directors, appointment of new management, and the creation of new assets, dividends, earnings, government rules and regulations, inflation, and other economic conditions, investor behavior, market conditions, money supply, competition, uncontrolled natural or environmental circumstances directly affecting the production of the company, the behavior of market participants, strikes, etc. are some of the internal and external factors that influence the prices in the stock market hence the market turnover.

The degree of volatility presence in the stock market would lead investors to demand a higher risk premium, creating higher cost of capital, which impedes investment and slows economic development. Volatility may impair the smooth functioning of the financial system and adversely affect economic performance. Similarly, stock market volatility also has a number of negative implications. One of the ways in which it affects the market turnover and the economy is through its effect on consumer spending. Although there are many empirical studies on the volatility-volume relation, there is still no general consensus about what

23 actually drives the relation. Some studies find that number of trades appears to provide virtually all the explanation for the volatility-volume relation, with average trade size playing a trivial role. But others have reached a contrasting conclusion.

24 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

This chapter sets out various stages and phases that were followed in completing the study. It

involves a blueprint for the collection, measurement and analysis of data. Specifically the

following subsections were included; research design, target population, data collection, and finally data analysis.

3.2 Research Design

According to (Cooper & Schindler, 2001) a research design is the blue print for fulfilling research objectives and answering questions. Research design refers to the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in the procedure (Mugenda & Mugenda, 2003). The study adopted a causal study research design, which aims at establishing the relationship between given variables in a study. In this study, the relationship between market turnover and securities prices in emerging markets in Nairobi securities was to be established.

The data to be used in the study was a review of the past trend in market turnover and the prices of securities at the Nairobi Securities Exchange. The data was collected from the NSE performance trend for the period between January 2007 to December 2011. This period was appropriate since this is the time when the market turnover would be influenced by the factors such the political stability of the country and the financial crisis that had recently influenced the performance of most financial institutions in Kenya and the entire globe.

3.3 Target Population and Sampling Frame

3.3.1 Target Population

Target population is the results of the population on which of the study were generalized

(Mugenda & Mugenda, 2003). The target population for the study were the firms Nairobi

Securities Exchange.

25 3.3.2 Sample Design

3.3.2.1 Sampling Frame The sampling frame of this study includes categories such as the Agricultural firms, Banking, investment, construction and allied, telecommunication and technology, commercial and services, manufacturing and allied, energy and petroleum, automobiles and accessories, and lastly insurance quoted in Nairobi Stock Exchange. The data to be collected was based on trend of behavior of the firms listed in the Nairobi Securities Exchange for the period 2007 to 20II as shown in the sampling frame (Appendix IV)

3.3.2.2 Sampling Technique This study adopted random sampling procedure to select two firms from each of the categories listed in the sample frame. Since the total categories in the sample frame is 10. This study picked two firms from each of the categories.

3.3.2.3 Sample Size This study collected data from 20 firms from the total population of 59. This study constituted 34% of the population. According to Mugenda & Mugenda (2003) a 10% sample is appropriate for a study. Thus 34%) was deemed reasonable and reliable for this study.

3.4 Data Collection Method

The study used secondary data from the NSE. Data was obtained from the NSE library published Audited financial statements and cover the period between January 2007 to

December 2011. The data was collected with the use of a secondary data guide, this was appropriate since the data on this study was past and readily available in the NSE library.

Major event that would influence the turnover for instance inflation and the period before and after elections was considered to evaluate the changes in pricing of the securities in NSE. The study focused on NSE performance as measured using the NSE 20 share index on a monthly basis for the study period

3.5 Research Procedure

The researcher booked advance appointment with the NSE on the need to carry out the research. This was to allow the management to make necessary arrangement and make sure

26 that the required data for the study is available to the researcher during the time for data collection.

The research utilized Field Research Guide as an instrument to guide the researcher in collecting the data required to meet the objectives of the study. This involved a set of questions that the researcher would use in the collection of data or in case, an interview was performed. It makes it possible to obtain data required to meet specific objectives of the study.

3.5.1 Pretest Study

The research tool was first tested for reliability before the actual study. This was carried in two firms which were not part of the actual study. The research guide was then corrected accordingly. The researcher was able to test its validity by checking whether the questions asked are significant in regard to the current phenomenon of study and in answering the research questions to obtain the required information. Its reliability was measured by the consistency and repetitive pattern of the information obtained in the data collection.

3.6 Data Analysis

The content analysis was done on the trend of market turnover, the trend of share and dividend price index and changes in the prices of securities in the stipulated period in the NSE. This was essential in showing the relationship between the two variables at any given period. According to Mugenda & Mugenda, (2003) content analysis is used to make inferences about the antecedents of a communication, to describe and make inferences about characteristics of a communication and to make inferences about the effects of a communication. It involved observation and detailed description of phenomena that comprise the object of study. The collected data was edited and confirmed for validity before the analysis was done. Qualitative data was analyzed using content analysis which was based on summarizing the content matter of the data and the data with common themes or patterns was grouped together into coherent categories. Only the relevant non-redundant content was presented. This method was preferred because the information collected was qualitative and therefore require analytical understanding. Any descriptive statistics was analyzed by the use

27 of measures of central tendency with the aid of a computer program (Statistical Package for

Social Sciences-SPSS) and presented in tables and graphs (pie charts and bar graphs) while the explanation to the same was be presented in prose.

3.7 Chapter Summary

This study adopted a causal study research design. This is because the main objective was to establish the relationship between the market turnover and securities prices. The target population was the firms quoted in NSE. The firms were categorized into strata then two firms were selected randomly from each category. The sample size of the study was 20 which constituted 33% of the total population. The study obtained data from the NSE library published Audited financial statements and covered the period between January 2007 to

December 2011. The researcher used secondary data research guide while collecting the data.

A portion of the data from two firms was used to pre test the tool before the actual study. The data was analysis using content analysis and the findings presented in prose.

28 CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.0 Introduction

This study was motivated by the need to establish the relationship between market turnover and securities prices in Nairobi securities. This chapter presents the findings of the market turnover, price of the securities and the price indices of the firms quoted in NSE over the years,

4.1 Sampled Firms Information

This study collected data from firms quoted in Nairobi Stock Exchange. Details of the companies sampled are as follows;

4.1.1 Percentage Representation of Firms per Sector

The Table 4.1 below shows the number of firms per sector. From the table we find that the

sector with the highest number of firms at the NSE is banking while representing 17% of the

number of listed firms while the Telecommunicafion and technology has only two firms, which represent only 3% of the number of firms listed at the NSE.

Table 4.1: Percentage Representation of Firms per Sector

Sector Number sector as % Number % of the in the (%) of sampled sector sector market sampled

Agricultural 7 12% 2 29% Automobiles and Accessories 4 7% 2 50% Banking 10 17% 2 20% Commercial and Services 9 15% 2 22% Insurance 5 8% 2 40% Investments 4 7% 2 50% Energy and Petroleum 4 7% 2 50% Telecommunication and Technology 2 3% 2 100% Construction and Allied 5 8% 2 40% Manufacturing and Allied 9 15% 2 22% Total 59 100%

29 4.1.2 Capitalization and Issued Shares of the Firms Selected in the Sample

Table 4.2, below portrays the market capitalization and number of issued shares of the firms sampled and proceed to seek how representative they are. From the table one sees that the sampled firms represent 48% of the entire market in terms of market capitalization and 74% in terms of shares issued by this firms while compared to the entire NSE market.

Table 4.2 Market Capitalization and Issued shares of the Firms Selected in the Sample

Sector Sampled Firms MRT CAP '000' At The End Of 2011 AGRICULTURAL Kakuzi 1,362,200.00 Rea Vipingo Plantations Ltd 867,000.00 AUTOMOBILES & Marshalls (E.A.) Ltd 179,914.00 ACCESSORIES Sameer Africa Ltd 1,224,707.00 BANKING Barclays Bank Ltd 70,881,545.00 Kenya Commercial Bank Ltd 50,021,845.00 COMMERCIAL AND SERVICES Kenya Airways Ltd Ord 9,578,521.00 Nation Media Group Ord. 21,996,600.00 CONSTRUCTION & ALLIED Bamburi Cement Ltd Ord 45,369,909.00 E.A.Portland Cement Ltd Ord 5,040,000.00 ENERGY & PETROLEUM KenGen Ltd Ord. 2.50 18,576,154.00 Kenya Power & Lighting Co Ltd 30,442,886.00 INSURANCE CFC Insurance Holdings Ltd 3,375,021.00 Jubilee Holdings Ltd 8,439,750.00 INVESTMENT City Trust Ltd Ord 1,603,928.00 Olympia Capital Holdings ltd 128,000.00 MANUFACTURING & ALLIED British American Tobacco Kenya Ltd 24,600,000.00 Carbacid Investments Ltd 3,109,194.00 TELECOMMUNICATION & AccessKenya Group Ltd 1,071,634.00 TECHNOLOGY Safaricom Ltd 118,000,000.00 Total for Sampled Firms 415,868,808.00 Total for NSE 864150423.00 Percentage Representation of the 48% Sample Generated from NSE statistics

Of the twenty firms sampled the mean capitalization was Kshs. 20,793,440,400. Thirteen firms were below the mean while seven were above. This could be compared to a mean of

30 Kshs. 14,646,617,340 for the entire marlcet which is 43 firms below it and only 16 firms

above that mean.

4.1.3 Top 10 Companies by Market Capitalization at the NSE (end of 2011)

The table below shows the top ten firms at the NSE in terms of market capitalization.

Evidently, from this table we are able to establish that 60%of the top ten firms in this respect

were sampled in our study.

It is also worth noting that of this top ten firms constitute 72% of the market capitalization of

the entire market which show a loop-sided concentration of the NSE in terms of

capitalization where the rest of the 49 firms only represent 28% of the market capitalization

of the entire market.

Table 4.3 Top 10 Companies by Market Capitalization at the NSE (end of 2011)

Market Capitalization (Kshs.

Listed Company Billion)

East African Breweries Ltd 136

Safaricom 118

Barclays Bank 71

Equity Bank 61

Kenya commercial Bank 50

Standard chartered Bank 46

Bamburi cement 45

Cooperative bank 44

Kenya power 30

British American Tobacco 25

Top ten firms Total market Capitalization 626

Total market Capitalization 864

Market concentration 72%

Source: CMA Statistical Bulletin

31 4.1.4 Top 10 Companies by Equity Turnover (2011)

The sampled firms were again very well represented in the Top Ten firms at the NSE in terms of turnover, represented at 50%.

Table 4.4 Top 10 Companies by Equity Turnover (2011)

Average Monthly

Turnover(Kshs. millions)for

Listed Company 2011

Safaricom 795.57

Equity Bank 768.89

East African Breweries Ltd 496.68

Kenya commercial Bank 412.75

Scan Group 182.60

Cooperative bank 167.49

Kenya power 149.19

Barclays Bank 146.47

Diamond Trust 128.58

British American Tobacco 83.66

Source: CMA Statistical Bulletin

4.2 Relationship between Market Turnover and the Securities Prices

The study sought to establish the relationship between the market turnover and the prices of the securities. The findings are shown in figure 4.1. The data was collected on quarterly basis so as to provide a more accurate trend and to increase the effctiveness of the findings.

32 450

June Dec Mar June Dec Mar June Dec Mar June Dec Mar June Dec 07 07 08 08 08 09 09 09 10 10 10 11 11 11

• Share price U Market turnover

Figure 4.1: Relationship between Market Turnover and the Securities Prices

Figure 1 shows the findings on the relationship of the market turnover and the prices of the securities over the period between 2007 and 2011. For the purposes of clear understanding of the relationship the market turnover are given in (000, 000) units. This was to facilitate comparison with the NSE price indices which were observed to the very low and thus uncomparable if they were graphed in their original forms.

From the figure, the low market turnover in March 2008 tallies with the low prices of the securities in the same period. An increase in the market turn over in June 2008 also correspondes with the increase in the price of the securities in the same period. This seem to have a relationship of a kind.

This relationship is corroborated by general aggregate market statistics for the period under study. Figure 4.2 show the aggregate equity turnover over the period against the NSE 20- share index.

33 • equity

2007 2008 2009 2010 2011

Figure 4.2: Relationship between Equity Turnover and the Securities Prices

The graph show a very congruent relationship between the two variables. Both the market turnover and price index are seem to be high around 2010 and they both are in dip around

2009.

4.2.1 Correlational Relationship between Share Prices and Sales Volume.

Table 4.5 shows the co relational results of the relationship between share prices and sales volume.

Table 4.5: Correlational Relationship between Share Prices and Sales Volume.

Share prices sales volume

Share prices 1 0.328 sales volume 0.328 1

The findings on the correlation showed a positive correlation of 0.328. This shows that the share prices and sales volume are related. The findings indicate that there is a positive relationship between the turnover and the prices of the securities.

34 4.2.2 Trend of Market Turnover for the Companies listed in Nairobi Stock Exchange

4.2.2.1. Equity Turnover of the Companies Quoted in NSE

The study collected data on the equity turnover of the companies quoted in NSE from the

NSE library published Audited financial statements. The findings are shown in Figure 4.3.

Equity Turnover in KSh.

600,000,000

500,000,000

400,000,000

300,000,000

200,000,000

100,000,000

0 H i 1 i i i ! 1 1 1 1 1 i 1 June Dec Mar June Dec Mar June Dec Mar June Dec Mar June Dec 07 07 08 08 08 09 09 09 10 10 10 11 11 11

Figure 4 3 Equity Turnover of the Companies Quoted in NSE

Figure 4.3 shows the equity turnover of the companies qouted in NSE. From the findings,

The turnover seem to be high in 2007 before declining upto March 2008. The turnover then sharply increased in June 2008 before declining in the following period. The trend hit lowest mark in June 2010 and shot in March and June of 2011 then decresead towards the end of the year

4.2.2.2 Trend of Market Turnover of the Firms Qouted in NSE

The findings on the market turnover is shown in Figure 4.4.

35 Market turnover 45000000 40000000 35000000 30000000 25000000 20000000 1697270U * Market turnover 15000000 10000000 5000000 3732100 0 June Dec Mar June Dec Mar June Dec Mar June Dec Mar June Dec 07 07 08 08 08 09 09 09 10 10 10 11 11 11

Figure 4.4: Trend of Market Turnover of the Firms Quoted in NSE

Source :NSE library published Audited financial statements

Findings on the market turnover reflected almost similar trend. The findings shown in Figure

4.4 shows low levels of turnover from June 2007 to March 2008. The trend took a sharp increase in June 2008 before suddenly decreasing towards the end of the year. There were high levesl of turnover in March 2010 and March 2011. However, the trend decreased towards the end of 2011.

4.2.2.3 Major Determinant Factors that were found to Affect the Market Turnover in this Period

From information obtained from NSE and the Capital Markets Authority reports over the period of the study 2007 to 2011 coupled with perusal of annual reports of various sampled firms on their performance, and marketing surveys of the firms the study found the following factors as determining the market turnover.

Risks and uncertainties

36 Market risk: Stock prices were volatile and unpredictable subject to different market and

economic factors both locally and internationally. The investors considered the local and

international markets twists before making investment decisions.

Business risk: The investors could trade depending on the management of the company. The

rate at which investors invest is heavily influenced by the performance of the company. This

could be a result of many factors such as poor management, slowdown of the industry and

competition. A listed company may suffer a severe decline in profits or even go bankrupt this

influences investors' decision.

Highly externally-oriented market

The study noted that apart from its own economic fundamentals, market performance in Kenya is subject to the influence of the rest of the world. In general, the performance of the Kenyan stock market moves in line with major overseas market.

Banking sector vulnerabilities

Bank liquidity is another important banking characteristic that could reduce the magnitude of

share transactions. Indeed, we find that bank liquidity is related to the extent of security prices across stock market.

Investors' confidence

Investors' confidence is the expectation of future stock market stability, which is an

important factor in determining stock market volatility. The respondents explained that the

level of confidence of the investors in the security trading affected to a great extent the

activities of the stock market.

Regulatory and institutional factors

Regulatory was stated to influence the functioning of stock markets. For example, mandatory disclosures of reliable information about firms may enhance investor participation and regulations that instill investor confidence in brokers should encourage investment and trading in stock market.

37 4.2.3 Prospected Trend of Market Turnover and Changes in the Security Prices

The respondents stated that they expected a flattening trend in the security prices. This is because this was an election year and the investors demand for shares could affect the stock market considerably.

4.3 Whether Market Turnover Affects the Stock Prices Volatility of Firms Quoted in

NSE: Regression analysis

The relationship between stock prices and volume of the securities is shown in table 4.2.

Table 4.6: The Effect of Sales Volume on the Stock Prices

Coefficients Standard Error tStat P-value Lower 95% Upper 95% Intercept -3082309 18511845 -0.1665 0.871891 -4.6E+07 39606082 Sales volume2233.60 4 227354.4 0.982433 0.354661 -300920 747640.5

In order to test the effect of the market turnover on securities prices. The study adopted a regression model. The original model was given as

Y-a+b|X+e

Where Y= stock prices a= represents a constant term bi = represents the coefficient of market turnover(sales volume)

X= represents the market turnover e= represents an error.

Table 4.2 shows the performance of the share prices and sales volume. A univariate model of the equation gave the following results.

The regression result yielded a=-3082309 and bi was 2233.604X.

38 The regression equation then becomes Y= -3082309+2233.604X

A regression run of the sales volume on the share prices indicates a positive impact

(2233.604). Thus holding other factors constant a unit increase in market turnover leads to a unit increase in share prices. Thus sales volume has a direct relationship with the share prices.

4.4 The Trend of Price Indices of the Nairobi Securities Exchange

NSE 20 share index

6,000

-NSE 20 share index

1,000

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Figure 4.5: Trend of NSE 20-Share Index

The movement of the index was also reviewed against market capitalization. This is depicted in Figure 4.6

39 Market Capitalis ation

•—index

2007 2008 2009 2010 2011

Figure 4.6: Trend of NSE Price Index against Market Capitalization

Both the NSE 20-share index and the market capitalization move almost in tandem. The fall at the beginning of 2008 all the way to 2009 can be attributed to the global financial crises, the effect of draught and the Post election violence. With the draught and post election violence for example the general returns for most firms were not good thereby leading to low dividend payment and therefore low general prices. Rise at quarter three 2010 is attributable to the positive effect of the successive referendum while subsequent fall is due to the effect of the jitters of 2013 elections and the heightened political temperatures. Some of the downturn at the end of 201 lis also attributable to the fall of the shilling and the Euro crisis which have resulted in inflation and more importantly high interest rates that make equities less attractive and therefore the downturn.

4.4.1 Aspects that were seen to Determine the Changes in the Share Price Index

Prevailing market condition

The price of the stock of a company is affected most of the time by the general market direction during a session. In a bull market, the stock price of most companies will rise and in a bear market, the stock price of most companies will fall. High interest rates will make equities less attractive. One can gauge the market sentiment by looking at stock indexes or its future price movement.

40 The performance of the industry.

The performance of the sector or industry that the company is in also plays in part in determining the stock price of the company. Most of the times, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions will generally affects the companies in the same industry the same way. Of course, there are exceptions to this. Sometimes, the stock price of a company will benefit from a piece of bad news in its competitor if the companies are competing for the same target market.

The earning results and earning guidance.

Investors and traders always assess a company based on its Earning Per Share (bottom line)

and Revenue (top line) and its future earning potential. Companies generally report the

earnings results annually. A company that achieves good earning results (EPS and Revenue)

expects a boost in its share price and one that delivers poor earning result shall see a beating

in its share price. Sometimes, besides reporting the EPS and Revenue for the past annualy, a

company may also issue guidance (expected value) for the EPS and Revenue in coming

quarter or coming years. This is also closely monitored by investors and is an important

factor that will affect the company stock price.

Dividend.

After the announcement of a dividend. The stock price may increase by an amount close to

the dividend per share value. However, the stock price may drop on the ex-dividend date by

the dividend per share amount. This is because anyone buying a stock on or after the ex-

dividend date are not entitled to the corresponding dividend payment.

General macro-economic environment

The perceptions or realities in the general economy affect the index. When the outlook is

poor investors will exit the market thereby lowering the general prices as they do so. Again

when the polifical environment is not conducive prices will fall too.

41 4.5 Chapter Summary

This chapter has discussed the findings of the study. The study sought to evaluate the relationship between market turnover and securities prices in emerging markets in Nairobi securities exchange. A correlation analysis produced a value of 0.328. The interpretation of these results indicates that the market turnover and securities prices have a positive relationship. The second objective was achieved by running a regression analysis. The regression results produced a value of (2233.604). Thus a unit inmcreas in the market turnover increseaed the prices of the securities by 2233.604 holding other things constant. Finally the trend of equity turnover was established closely.

The trend took a sharp increase in June 2008 before suddenly decreasing towards the end of the year. There were high levesl of turnover in March 2010 and March 2011. However, the trend decreased towards the end of 2011. The study propects that the turnover will flatten this year because of the influence of the politics especially due to the elections. The study eablished factors affecting marketturn over as risks, external influence,investors confidence, and regulatory frame work.

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42 CHAPTER FIVE

5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter presents the discussions, conclusions and recommendations of the study. The chapter is organized into sections. The sections are on the summary of the study, discussion of the findings, conclusions of the study, recommendations of the study and the suggestions for further studies.

5.2 Summary

This study was motivated by the need to establish the relationship between the share prices and the market turnover of the companies listed in Nairobi Stock Exchange (NSE). The specific objectives of the study were:

(i) To evaluate the relationship between market turnover and securities prices in emerging markets in Nairobi securities

(ii) To determine whether market turnover affects the stock prices volatility of firms quoted in NSE

(iii) To evaluate the trend of price indices of the Nairobi securities exchange.

The study used a casual research design to achieve the objectives. The data was collected from the NSE published materials and oral interviews with some of the NSE officials. The study found that the market turnover and the securities prices were positively related. When the market turnover increases the prices of the securities also increases. On the effect of the market turnover on the prices of the securities, the study established that market turnover influenced the prices of the securities. When the turnover shoots up, this effect caused the prices of the securities to assume an increasing trend. The market turnover exhibited a non constant trend. There was a high market turnover in June 2008 and 2009 than the rest of the periods.

The study recommends that management focus on making their firms profits stable to win the investors confidence. Proper mechanism be put in place to win the confidence of the

43 investors by providing timely and accurate financial reports. Bank managers should also employ a multivariate debt control mechanism so as to prevent insolvency problems which drive away investors leading to low security prices. The study too recommended that firms effort to maintain the reputation of the firms so as to keep the investors confidence high. More importantly to note the management of the firms should plan and execute proper control mechanisms regarding the debt management and control. This helps the firm to make good investments, maintain high profits and win investors. This has an overall role of improving the performance of the share prices at the stock market.

5.3 Discussion

5.3.1 The Trend of Price Indices of the Nairobi Securities Exchange. The market equity turnover was seen to have an unstable trend with hikes and falls. The equity turnover was noted as having sharply increased in June 2008 and June to September of the year 2009. Similarly, the study findings indicate that there was a high market turnover in

June 2008 and 2009.

On the factors which affect market turnover, the study established one of the determinants as the risks and uncertainties associated with a certain stock. The risks are either market risk or business risk. The investors seem to consider the market risk by looking at the local and international markets. This could be as a result of many factors such as poor management, slowdown of the industry and competition. A listed company may suffer a severe decline in profits or even go bankrupt this infiuences investors' decision. This is because the invests highly rely on the performance of the firms before they make their investment decisions. This results corresponds to the Levine & Zervos (1996) findings that a rise in risk of equity investment which compels investors to shift funds to less risky assets A bankrupt firm cannot attract investors because of the low level of investors confidence.

The high level of linkage between Kenya and the rest of the world also influences the rate at which people trade in shares. This is because the markets are somehow linked with international markets and centers. The international markets exhibit saw-like trend thus their

44 market operations are never stable. This affects the local markets such as the Kenya market since the market uses dollars and depends on other partners in the world.

Also the link with financial currency also plays a major role in determining the market turnover. The Kenyan firms heavily trade with other international firms for imports and exports. These transactions are normally traded in dollars, euros and other foreign currencies. These currencies are subject to fluctuations from world market shocks. This effect is transferred to the local market affecting the rate at which profits are made by the local firms. Low profits lower company's reputation and investors confidence.

The banking and financial activities also have a great impact on the rate at which shares are traded in the Nairobi stock market. When the financial systems and the banking activities are doing well. This creates good cash for financing investments in the market. The level of investment in the economy affects the stock market operations.

Also the investors confidence was found to affect the market turnover to a great extent.

Finally the regulatory and institutional factors were also found to affect the market turn over of the Nairobi stock market. When the confidence of the investors is low the number of shares traded declines, the vice versa is true.

5.3.2 How Market Turnover Affects Stock Prices of Firms The study established that prevailing market condition largely affect the share prices. In a booming market, the stock price of most companies will rise and in a bear market the stock price of most companies will fall. Therefore, the prevailing market conditions play a big role in influencing the share prices. A study by Maysami, Ramin, Koh, & Tiong (2000) found that the presetnt conditions of the market affected the price of stocks. For example increase in expected inflation rate was likely to lead to economic tightening policies that would have negative effect upon stock prices Also DeFina (1991) found that cash flows do rise at the same rate as inflation, and the rise in discount rate leads to lower stock prices. This further affirms the findings of this study.

The performance of the industry also was found to affect the prices of the securities. This was earlier observed by Tauchen & Pitts (1983) whose findings indicated that there existed a negative relationship between volume and volatility of returns of a firm or system.. This is

45 because Investors and traders always assess a company based on its Earning Per Share (bottom line) and Revenue (top line) and its future earning potential. A company that achieves good earnings results (EPS and Revenue) expects a boost in its share price and one that delivers poor earning result shall see a beating in its share price.

The splitting of shares was also known to affect the prices of the securities. Stock price

increases (after taking into account the increase in the number of share) after a stock split.

Some attributed to the better affordability of the stock after stock split; some attributed this to the perception of cheap stock due to the lower stock price after the stock split. Some however believes that stock split has no real impact on the stock price (effective stock price, taking into account the change in number of shares), as the stock price will increase regardless of stock split. These findings confirmed an earlier study by (Lane & Jacobson,

1995) on effects of stock prices caused by different events, such as the publication of result reports, dividend announcements, information about share splits, and changes in accounting standards

Other factors include news about new technology, patent approval, war, natural disaster, product recalls and lawsuits that shall have positive and negative impact to the relevant company stocks. The health or mishap of a key leader in a company may also affect the stock price of the company.

The regression results yielded a positive relationship of the sales volume on the share prices.

The value (2233.604), indicates that sales volume influences the share prices positively.. The findings indicate that the market turnover influenced the share prices. An increase in market turnover would lead to a subsequent increase in the price of the shares.

5.3.3 Relationship between Sales Turnover and the Prices of the Securities in Nairobi

Stock Market The relationship of the share prices and the sales volume was found to be positive. This shows that when the prices of the securities generally increases there is increased transactions on shares. This results are in tandem with Tauchen & Pitts, (1983) studies which confirmed that there existed a relationship between volatility of the share prices and volume of securities traded.

46 The relationship could be related to different reasons. The prevailing market condition affects greatly the prices of the shares. When the market was doing well, the stock price of most companies will rise and in a bear market the stock price of most companies will fall. One can gauge the market sentiment by looking at stock indexes or its future price movement. This corresponds with Molodovsky & Nicholas (1995) studies which confirmed that behavior of market participants was an important factor influencing factor of stock price.

Another reason which affect the price of shares is the performance of the industries, those firms which are in the same industry tend to be performing almost similar in securities market. A different scenario will be where a firm benefits from the bad news of a competitor. But mostly when the industries are different and diverse the trend of the stock prices also becomes unpredictable.

The profitability of a firm speaks a lot to the investors. When the a company achieves good earning results (EPS and Revenue) it expects a boost in its share price and one that delivers poor earning result experiences a decline in its share price. The same results were observed

by Coyne & Witter (2002) inn their model which support a company in creating a picture of their investors' buying and selling behaviors and their customers' buying behavior.

Sometimes, besides reporting the EPS and Revenue for the past annually, a company may also issue guidance (expected value) for the EPS and Revenue in coming quarter or coming years. A low prediction or prospect speaks less to the firm and a high prospect speaks a lot

.This affects the investors confidence and largely the share prices.

5.4 Conclusion

The study concludes that the turnover has had a varying trend in prices since 2007. The study established that the equity turnover sharply increased in June 2008 and June to September of the year 2009. There was a sharp increase in March 2010 and a low point in June 2010. A rising trend was observed towards the end of 2010 hitting highest in March and June 2011.

Similarly, the study concludes that the trend of the market turnover has been varying since 2007 to December 2011. The trend of the turnover increased sharply in June 2008 and sudden decreased in March and June 2009. There was a sharp increase in March 2011 before

47 hitting a low point in December 2011. The study concludes that the market turnover is affected by the risks associated with the stock prices, banking activities and the investors' confidence.

The study concludes that the market turnover affects the prices of the securities. This could

be explained by the fact that the increased activities create a temporal demand. This demand

makes the prices to shoot up and the securities prices too hike in the stock market.

The study concludes that the market turnover of the firms quoted in Nairobi Stock market and the prices of the securities have a positive direct relationship. When the prices increase the market turnover increases and vice versa.

On the prospected trend of market turnover and changes in the security prices, the study

concludes that the price of shares will flatten due to the political influence and the hard

economic crisis being experienced in the country along side other factors.

5.5 Recommendations

5.5.1 Suggestions for Improvement

5.5.1.1 Development of a Broad Based Customer Base to Minimize Risk

The study has found that one of the determinants of the market turnover is the risks associated with trading in stock. Therefore it is highly recommended that the management of the firms develop a broad Customer Base to minimize risk. This is because degree of risk is a major factor in a buyer's purchase price. A business with a muhitude of independent customers is generally more predictable and represents a lower risk than a similar business that depends heavily on one or a handful of major customers.

5.5.1.2 Minimization of Company Debts

The study has found that the debt of a company influences the share price which in turn influences the turnover. Debt outstanding at the closing is often deducted from the gross purchase price to determine the amount the sellers actually receive. Many businesses are nearly impossible to sell for any net price that is reasonable to the owner because the debt exceeds the gross value of the business. This in turn influences the share prices of the dividend price and the share prices.

48 5.5.1.3 Stabilization of Company Profits The study has found that the stability of earnings affect the stock market operations. When purchasing stock, the buyer makes a judgment as to what he can earn on his investment. Projecting results for a company with historical saw tooth peaks and valleys in sales and profits is very difficult; accordingly, buyers will devalue such a company s resuhs. Thus it is recommended that management focus on making their firms profits stable to win the investors confidence.

5.5.1.4 Maintaining High Reputation The study found that the image of a company as influencing the stock market operations. Therefore management should focus on wining the confidence of the investors by providing timely and accurate financial reports A buyer loses faith in a company's credibility if he can't understand and have a high degree of confidence in its reports.

5.5.2 Suggestions for Further Study This study was confined to the information from companies listed in the Nairobi stock Market. This could be different from those which are not listed in the market. Thus this study recommends that other studies be done on the other companies which are not quoted in Nairobi stock market to reveal more on the findings.

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55 APPENDICES

Appendix I: Cover Letter

CHIEF EXECUTIVE OFFICER,

NAIROBI SECURITIES EXCHANGE,

P.O BOX 43633-00100;

NAIROBI.

Dear Sir,

RE: REQUEST FOR RESEARCH DATA

I am a Master of Business (MBA) student at tlie United States International University,

Nairobi. 1 am currently undertaking a research to establish 'the relationship between the market turnover and the securities prices in emerging markets focusing on Nairobi

Securities Exchange', in partial fulfillment of the requirements for the award of the said degree. To achieve this goal, I kindly request you to allow me to collect data from your organization's library.

Please note that the information collected will be treated as confidential, and will only be used to complete the research project for my MBA degree. The findings of the study shall be availed to you to inform policy in your organization going forward.

Thank you in advance.

Sincerely,

Kagure Grace

MBA Student

USIU

56 Appendix II: Field Research Guide

a) Trend of market turnover for the period between January 2007 and December

2011 in the Nairobi Stock Exchange.

i. What are the major determinant factors that affect the market turnover in this

period?

ii. What are the different aspects that determine the changes in the dividend price

index and causes of highs and lows of the same?

iii. What are the different aspects that determine the changes in the share price index

and causes of highs and lows of the same?

b) To determine whether market turnover affects the stock prices volatility of firms

quoted in NSE

i. The impact of market turnover changes on the security prices of the companies

listed in Nairobi Stock market.

ii. Which period shows high and low sales volume? What is the relationship with the

stock prices?.

c) Relationships that can be derived from the information gathered on the changes in

security prices with the changes in market turnover?

i. What is the prospected trend of market turnover and changes in the security prices?

ii. What is the relationship between market turnover and security prices?

57 Appendix III: Secondary Data Collection Template

Company A

Equity turnover Market turnover Share price index

Year 2007

March

June

Sept

Dec

Year 2008

March

June

Sept

Dec

Year 2009

March

June

Sept

Dec

Year 2010

March

June

Sept

Dec

Year 2011

March

June

Sept

Dec

58 Appendix IV: Sampled Firms per Sector

Sector Selected firms

Agricultural Sector 1. Kakuzi, 2. Rea Vipingo plantations

Automobiles and Accessories 1. Sameer Africa ltd 2. Marshalls

Banking 1. Barclays and 2. Kenya Commercial banks

Commercial and Services Sector 1. Nation media group 2. Kenya Airways

Insurance Firms 1. Jubilee holdings ltd 2. CFC insurance holdings

Investments 1. City Trust Ltd 2. Olympia Capital Holdings LTd

Energy and Petroleum 1. Kengen Co. Ltd 2. Kenya Power & Lighting Co. Ltd

Telecommunication and Technology 1. Safaricom and

2. Access Kenya Group Ltd)

Construction and Allied 1. Bamburi Cement Ltd 2. E.A Portland Cement Co.Ltd

Manufacturing and Allied 1. British American Tobacco Kenya LTd 2. Carbacid Investments Ltd

59 Appendix V: List of Companies Listed in the Nairobi Stock Exchange

Athi River Mining AGRICULTURAL .Bamburi Cement Ltd Eaagads Ltd Crown Berger Kenya Ltd Kakuzi Ltd E.A.Cables Ltd Kapchorua Tea Co. Ltd E.A.Portland Cement Co. Ltd The Limuru Tea Co. Ltd Rea Vipingo Plantations Ltd ENERGY & PETROLEUM Sasini Ltd KenGen Co. Ltd Williamson Tea Kenya Ltd KenolKobil Ltd Kenya Power & Lighting Co Ltd AUTOMOBILES & ACCESSORIES Total Kenya Ltd Car & General (K) Ltd CMC Holdings Ltd INSURANCE Marshalls (E.A.) Ltd British-American Investments Co.(Kenya)Ltd Sameer Africa Ltd CFC Insurance Holdings Ltd Jubilee Holdings Ltd Kenya Re Insurance Corporation Ltd BANKING Pan Africa Insurance Holdings Ltd Barclays Bank of Kenya Ltd CFC Stanbic of Kenya Holdings Ltd INVESTMENT Diamond Trust Bank Kenya Ltd Centum Investment Co Ltd Equity Bank Ltd City Trust Ltd Housing Finance Co.Kenya Ltd Olympia Capital Holdings Ltd Kenya Commercial Bank Ltd Trans-Century Ltd National Bank of Kenya Ltd NIC Bank Ltd MANUFACTURING & ALLIED Standard Chartered Bank Kenya Ltd A. Baumann & Co Ltd The Co-operative Bank of Kenya Ltd B. O.C Kenya Ltd British American Tobacco Kenya Ltd COMMERCIAL AND SERVICES Carbacid Investments Ltd Express Kenya Ltd East African Breweries Ltd Hutchings Biemer Ltd Eveready East Africa Ltd Kenya Airways Ltd Kenya Orchards Ltd Kenya Airways Ltd Rights Mumias Sugar Co. Ltd Nation Media Group Ltd Unga Group Ltd Scangroup Ltd Standard Group Ltd TELECOMMUNICATION & TECHNOLOGY TPS Eastem Africa Ltd AccessKenya Group Ltd Uchumi Supermarket Ltd Safaricom Ltd

CONSTRUCTION & ALLIED

United States ini^m..: f:.; university 60 Africa - Library