The Effect of Financial Performance on Stock Price Volatility of Commercial Banks Listed at Nairobi Securities Exchange

Abstract

Volatility of the stock prices is inevitable, and has partially been attributed to uncertainties in macroeconomic factors such as inflation, exchange rate and poor economic growth rate. Studies have argued that financial performance of a firm listed at stock markets can affect the movement of its stock prices and that firms with strong financial position have highly valued share prices. Commercial banks in Kenya play a critical role in all sectors of the economy. Their sound performance contributes to a better and profitable banking sector as well as a stronger financial system which is better able to endure negative shocks Kenya‟s. The debate on the effect of bank financial performance and share price volatility is inconclusive due to limitation in the existing literature. Therefore, this study sought to investigate the effect of financial performance on the volatility of share prices, focusing on commercial banks in Kenya trading at the Nairobi Securities Exchange. The study is guided by Revenue and Investment Catering, Capital Asset Pricing and EMH (Efficient Market Hypothesis) theories. The target population for the study were all commercial banks listed at the NSE. There are 11 commercial banks trading at the NSE for which this study investigated. This study used a descriptive survey design to explain how financial performance affects stock price volatility of commercial banks listed at the NSE, and regression analysis with the help of Ordinary Least Square method to estimate the effects and levels of significance. The study concludes that, there is a negative and but, not significant relationship between the return on equity and share price volatility of commercial banks listed at the Nairobi Securities exchange. In addition, inflation was also found to be negative and significant. Furthermore, the study found that, there is a positive and significant relationship bank interest rate spreads and volatility in the share prices. Based on the findings, the study recommends that banks trading at the NSE needs to maintain a good financial performance because, this could help to mitigate against their share price volatility. the study also recommended that government needs to find mechanisms to keep inflation at lower level because, high inflation has negative implications on business enterprises.