The Relationship Between Economic Growth and Market Capitalization of Companies Listed at the Nairobi Securities Exchange
Abstract
Evidence on the relation between economic growth and stock market capitalization are still
ambiguous, as early studies support the existence of a positive association, while more recent
contributions suggest a nonlinear U-shaped correspondence. Some opine that there is a positive
relationship amongst financial depth and economic growth, while some have provided
empirical evidence of nonlinear, an inverse U-shaped relationship. It is not excluded that the
relationship is even more complex and the impact varies depending of level of a country
economic and institutional development or level of integration, quality of the financial system,
its structure, and other factors. The objective of this research is to to determine the relationship
between economic growth and market capitalization of companies listed at the Nairobi
Securities Exchange. It also aimed at reviewing the increasing body of theoretical and empirical
studies that have endeavoured to examine the range of magnitude and relations between
economic growth and stock market capitalization. Secondary sources of data were employed.
Time series data was utilized, data was collected for the macro-economic phenomena over a
varying time periods. The research employed inferential statistics, which included correlation
analysis and Bayesian regression analysis so as to establish the effect of the economic growth
on stock market capitalization. The study findings exhibited that both Gross Capital Formation
and Government Final Consumption Expenditure had significant positive associations with
stock market capitalization. Additional study findings were that economic growth has no
significant effect on stock market capitalization and thus, it cannot be utilized to significantly
predict the stock market capitalization. Further findings were that the economic growth
components that entail; GDP growth, Households Consumption Expenditure, Gross Capital
Formation, and Government Final Consumption Expenditure had neither individual significant
association nor relationship with stock market capitalization. Policy recommendations were
made to the capital markets’ regulators, the National Treasury and Capital Markets Authority
to delink economic growth from development of the capital markets. The policy makers should
direct their energy in crafting other policies and legislations to bolster the financial deepening
of the capital markets and not bank on economic growth. Further recommendations were made
to the capital markets practitioners such as firm management, consultants, investment banks,
equity analysts, and individual investors not to rely on the information on the economy in order
to determine the value of companies. Firm management should focus on the company
fundamentals to increase the companies’ intrinsic value. Investment banks, equity analysts, and
individual investors should not anticipate a bull run during periods of booming economic
growth. In contrast, they should endeavour to establish the companies’ intrinsic values and
future prospects in determining the counters to buy and hold or to sell.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1411]
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