Effect of Energy Regulatory Commission’s Announcements on Stock Returns of Firms in the Petroleum and Energy Sector at the Nairobi Securities Exchange

Abstract

The returns of securities such as stocks trading in securities exchanges across the world respond differently to different events and information components reaching the market in which such securities are listed. Several researchers have over the past used different models and methodologies to determine the information content of events and activities in the market. Previous literature strongly supports movement of stock prices and by extension stock returns as a result of events such as dividends and earnings announcements. However, very few researchers have studied the effect of Energy Regulatory Commission (ERC)’s announcements of price capping decisions on the returns of the firms listed in the affected sector in Kenya i.e. the Petroleum and Energy Sector. This study therefore sought to determine the effect the ERC’s announcements on maximum petroleum products prices have on the returns of stocks listed in the Petroleum and Energy Sector of the NSE across the one-year period between October 2017 and September 2018. The study used the Event Study Methodology to achieve this objective using an 11-day long event window covering the period between Day -5 and Day +5 with the event date as the midpoint and an estimation period of 360 days before the event window. The findings of the study showed statistically significant Cumulative Abnormal Returns and significant negative Cumulative Mean Abnormal Returns during the event window at 95% confidence level. This indicates that ERC’s announcements had a significant negative impact on the returns of stocks listed in the NSE’s Petroleum and Energy Sector across the one-year period between October 2017 and September 2018.