Stock Market Efficiency in the Semi-strong Form: a Case Study of Covid-19 Announcements in the Nairobi Securities Exchange

Abstract

Movement in share prices are subject to the stock market efficiency, which indicates how the prices of individual securities incorporate and reflect the available past, present and future information. However, calamities, pandemics, political instability, among other news items are postulated to have a significant negative effect on financial markets. The study endevoured to determine the efficiency of the Nairobi Securities Exchange in the semi strong form, using a case study of the covid-19 announcement in Kenya. The theories anchoring the study included; the efficient market hypothesis, the prospect and the rational expectations theories. Secondary data used for analysis in the current study, which entailed daily stock prices. The current study was an event analysis of the Covid-19 pandemic outbreak announcement. The current study analysed the reaction of stock returns of listed firms 30 days before and after the pandemic. The study population was the 64 listed firms at the Nairobi Securities Exchange. Convenience sampling was utilized to derive a sample size comprising of a single company from each of the 11 sector of the economy categorised on the Nairobi Securities Exchange resulting into a sample size of 11 firms. Line graphs were used to observe the trend of the individual firms’ stock returns before the Covid-19 pandemic outbreak announcement event date and after the event date. T-test statistic was conducted to establish the significance of the Covid-19 pandemic outbreak announcement on stock prices. The study findings established that only 9.09% of the listed firms at the Nairobi Securities Exchange reacted negatively to Covid-19 pandemic. All the other firms (90.91%) reacted positively. The study further established that seven firms (63.64%) recorded negative abnormal returns, three firms (27.27%) recorded positive abnormal returns, and one firm (9.09%) recorded zero abnormal returns in reaction to the Covid-19 pandemic outbreak announcement. However, none of the abnormal returns were established by the current study findings to be statistically significant.. The study findings further found out that there was a steady decrease in Cumulative Average Abnormal Returns of the eleven listed firms at the NSE before the event date but stabilized as we approached the event date and this trend continued even after the event date. This implies that the President announcing the Covid-19 pandemic outbreak and initially instituting measures to curb the spread of the virus on 15 March 2020 did not have a cumulative effect on the stock returns for the eleven listed firms at the NSE. We suggest to policy makers and market regulators to formulate policies to enhance market efficiency for predictability of market behaviour by market players, which will enhance investor confidence in the operations of the securities market in the strong form because the Nairobi Securities Exchange is semi-strong form efficient as there are insignificant abnormal returns and investors cannot beat the market as a result of publicly available information. Recommendations are made to consultants and management of listed as well as other firms not to consider earnings as a factors that influence share prices/ firm value in the market but they should focus on intrinsic firm specific factors as they formulate strategies and policies to increase firm value. Recommendations are also made to investment banks, equity analysts, and individual investors not to consider earnings in order to increase their wealth or their clients’ wealth, but focus on intrinsic firm specific factors when analysing whether the firm is undervalued or overvalued. Finally, recommendations are generated to individual investors not to rely on positive earnings announcement by companies in which they want to post a long, hold, or short position, but should instead focus on intrinsic firm specific factors to analyse whether firms’ are undervalued or overvalued.