FOREIGN REMITTANCES AND STOCK RETURNS OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA

Jackson Mutua Kilaka, Daniel Makori

Abstract


Stock prices at Nairobi Securities Exchange have been decreasing for the last five years and at the same time foreign remittances have been fluctuating. A decrease in stock returns has an extreme negative influence on economy as well as individuals’ consumers. Further, a collapse in the stock prices has a potential of causing widespread economic disruptions and a decrease in stock prices must always be prevented. It is therefore essential to assess the association between foreign remittances and performance of stock returns. The objective of the research was to evaluate the effect of foreign remittances on stock returns in Nairobi Securities Exchange Kenya. The study was anchored on the free cash flow theory and prospect theory. This study employed an explanatory research design. Moreover, study population was 64 companies quoted in Nairobi Securities Exchange. Since the number of companies is small, a census was conducted, which implies that all the 64 companies were included in the study. This study employed secondary time series data. The study covered duration of 12 years and was collected on annual basis from January 2008 and December 2020. Secondary data on study variables was acquired from Nairobi Securities Exchange, Central Bank of Kenya and Kenya National Bureau of Statistics. Data extraction checklist was employed to gather secondary data. Statistical software referred to as the Stata version 2014 was deployed to analyze data. Inferential as well as descriptive statistics was deployed to analyze quantitative data. In addition, descriptive statistics comprised of the frequencies, percentages, mean as well as standard deviation. Moreover, inferential analysis consisted of Vector Error Correction Model which was utilized to establish the link between variables. The study carried out diagnostic tests which comprised of unit root test, lag order section test, normality test, Cointegration test and Granger Causality Test. The study discovered that foreign remittance has significant positive effect on stock returns in Nairobi Securities Exchange. The study recommends that the government of Kenya should come up with policies geared towards increasing remittance. For instance, the government should come up with a policy to reduce remittance delivery time with remittances being received instantly or at least very quickly in contrast to a lag of many days earlier.


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