The Impact of Interest Rate Capping on the Stock Returns of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Investors expect stock prices to react to some special event. They are however uncertain about the timing and magnitude of that reaction. If financial markets pick up information about an impending event, that event can change stock prices days or weeks before it occurs and continue to influence stock prices for some time thereafter. Enactment of laws by the legislature can cause things like interest rate capping which in turn influences the share prices in the stock market. The study adopted event study methodology. The objective of the study was to determine the impact of interest rate capping on the stock returns of commercial banks listed in the Nairobi Securities Exchange. The target population for this study was commercial banks listed at the Nairobi Securities Exchange. Data was obtained from the NSE during the year 2016 when interest capping came into effect. The study entailed collecting data on share price and price movement in the banking sector. The event period was 15 days prior the event and 15days after the event making an event window of 31days. The study sought to compare sector returns and market returns prior to and subsequent to the budget to assess how abnormal returns vary with the event. The study found interest rate capping had an impact on the cross-sectional average sector returns. The impact was observed over the event period within the banking sector reacting uniquely to the budget on different days within the event period. It was observed that opportunities to make abnormal gains existed just before, on and during the event period in some banks due to the interest capping. Significant positive cumulative abnormal returns were noted in the banks during the event window. However, statistical tests did not indicate significant differences between pre event and post event periods studied. This indicates that investors had on average, anticipated the effects of the event days before the interest rate capping.