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

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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. Copyright © 2012 Grace Kagure All rights reserved. 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 COPYRIGHT ii 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.
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