Effects of Exchange Rate Volatility on Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

From the accounting point of view, an increase in the volatility exchange brings about exchange rate increase and its risk which in turn leads to increase in transaction costs of companies. Higher transaction costs lower the expected earnings of companies which, subsequently, impacts negatively on reported profits. Hence, greater volatility of exchange rate reduces the level of international transactions because companies cannot be competitive on international trade due to high transaction and operating risks. When a company’s profits decline the stock returns will similarly decline and as a result the investors’ wealth is reduced. During the moments of the financial hardship, the high rate of volatility in the market of stocks leads to generation of the action in the speculation by both investors as well as the flight of capital. This therefore leads to high level of instability in the foreign market. In such circumstances, investors are likely to relocate resources out of such countries by selling their holdings or ownership in respective companies and investing in countries that have stable exchange rates. Fluctuations in stock returns of companies sometimes may lead to a multiple of consequences. First, people holding such kind of shares will emerge into wealth loss and if this particular kind of fall is big, the investors may shy off from investing in stocks thereby leading to a loss of confidence in the market of stocks. Second, mostly the movement of shares is a reflection of the current occurrences in the economic world. Bad headlines of falling share prices can create panic among investors which may affect the stock market operations. Thirdly, the price share fall can hinder the ability of the firm to raise cash in the market of stocks. Ordinarily, the companies are rapidly expanding hence they borrow by issuing their shares to the public world. The main goal of the research is to determine the impact of exchange rate volatility on prices of the stock of the firms that are fully listed in NSE. This was a descriptive study that utilized quantitative data in both data collection and data analysis. Descriptive research design usually entails procedural data collection methodology, data tabulation, depiction and describing the collection of data. The objective populace for this study included all of the listed companies in Nairobi Securities Exchange. Furthermore, the study utilized aggregate stock returns and stock market values for all the listed companies in the NSE. As at October 2016, there were sixty two listed companies categorized into ten broad economic sectors. From the findings, the exchange of the securities has the power to predict to enhance investment and produce quality returns from the stocks that have the variable that is forward looking that consolidates assumptions about money streams in the future and discount rates. Securities exchange returns serves as an index to investors or governments to in settling on their investment. The following conclusions are drawn; the main findings revealed that exchange rate volatility influences stock returns movement but the opposite is not applicable in Kenya. It was also established that exchange rate volatility is more important than actual changes in exchange rate as determinant of stock returns movement. This shows that the market of stocks is sensitive to the risks in the foreign exchange market than the actual movement in exchange rates themselves.