Sentiment, Risk Appetite, Demographic Characteristics and Stock Returns of Individual Investors at the Nairobi Securities Exchange

Abstract

The influence of investor sentiment on stock returns of individual investors is a field of research that is relatively new especially at the Nairobi Securities Exchange where studies on behavioural finance are just starting. The studies that have been conducted so far at the Nairobi Securities Exchange have been on behavioural biases. Hence the influence of investor sentiment is less understood especially within the context of the Kenyan market. There has been a lack of consensus about how investor sentiment affects stock returns in the studies that have been conducted up to now. Thus, the relationship between investor sentiment and stock returns is not clearly defined especially at the Nairobi Securities Exchange. In many of the reviewed studies, the indirect relationship between investor sentiment and stock returns considering the influence of other variables like risk appetite and demographic characteristics, has not been investigated. These variables so far have not been investigated together. Examining the mediation and moderating effects could contribute to resolving the existing conflict on the influence of investor sentiment on stock returns. In addition, most of the studies in this field have been conducted in developed countries with only a few done locally and thus they are not generalizable to an emerging market. Further, the political arena and public health status were not as turbulent as they recently have been. To fill the study gaps, this study investigated the relationship between investor sentiment and stock returns of individual investors at the Nairobi Securities Exchange. The study had four hypotheses to analyze in order to fill the gaps identified. The population of the study was 1.1 million individual investors at the Nairobi Securities Exchange and the sample size was 400. The philosophy of the study was positivism and it adopted a cross-sectional descriptive research design. The response rate was 70.3%. Descriptive statistics of the variables were computed and a correlation analysis among the variables was carried out using Spearman’s rank correlation and Pearson’s correlation coefficient and stepwise regression and tests of significance were conducted. The statistical analysis revealed that the relationship between investor sentiment and Sharpe ratio was not significant. Therefore, the study failed to reject the first hypothesis. The regression analysis demonstrated that there was no significant effect of risk appetite in the relationship between investor sentiment and Sharpe ratio therefore the second hypothesis was also not rejected. The investigation did not find a significant effect of demographic characteristics in the relationship between investor sentiment and risk appetite. Thus, the study failed to reject the third hypothesis too. The joint effect of investor sentiment, risk appetite, demographic characteristics and stock returns was not significant hence the study failed to reject the fourth hypothesis. The outcomes of the investigations contributed to knowledge and practice by demonstrating that Sharpe ratio was not related to investor sentiment. These findings contribute to the existing body of knowledge on investor sentiment. From this outcome an investor should not consider sentiment or risk appetite since they are not related to returns. The findings benefit investment managers as they get insights into investor sentiment which they can use to guide clients accordingly so that they do not to rely solely on subjective criteria. Corporate leaders learn from the outcome of the study to make financial information readily available since investor sentiment was found to have no impact on stock returns. The Government, Nairobi Securities Exchange can use the knowledge from this study to make policies that limit price fluctuations and foster stability in the market.