The Effect of Stock Market Liquidity on Stock Returns: Evidence From the Nairobi Securities Exchange

Abstract

One of the risks associated with company stocks is stock liquidity. Stocks with high liquidity are attractive to investors and increases demand for such stocks in the stock market. Increasing the attractiveness and demand for company stocks makes it easy and inexpensive to finance and increase capital for company development. Therefore, the objective of this study was to ascertain whether stock market liquidity affects the level of stock returns at the Nairobi Securities Exchange. In order to achieve the objective of the study, the research design was correlational and the population of the study consisted of all the listed firms at the Nairobi Securities Exchange. Secondary data for the period was collected from NSE data bank. The NSE All Share Index was used a proxy for the stock market return and its monthly data was collected between the years 2013 to 2017. Volume of shares traded was used as a proxy for liquidity. Multiple regression model was used for the purpose of analysis to determine the nature of the relationship. Empirical results of the regression model revealed that there is a strong correlation between stock market liquidity and return of listed firms at the Nairobi Securities Exchange. However, it is recommended that studies should be undertaken to determine other factors that might influence stock return other than stock market liquidity.