Effect of Information Asymmetry on Stock Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

The fundamental objective underlying stock market investments is to achieve a satisfactory return on investment, a goal that proves to be exceedingly challenging in the absence of substantial information for predicting stock performance. This study delves deeply into the intricate relationship between information asymmetry and stock performance of firms listed on Nairobi Securities Exchange. Employing a descriptive research design, the study utilized secondary daily share price data obtained from the NSE and annual financial reports of NSE-listed companies for the year 2022. Key methodologies included descriptive statistics, correlation analysis, and regression analysis, which were employed to examine connections and pinpoint noteworthy indicators of stock performance. The results indicate that the overall regression model holds statistical significance, given the F-statistic of 5.818, which is associated with a remarkably low p-value (Sig. = 0.000). The regression model further discloses a statistically significant moderating effect of information asymmetry on stock performance, with an R value of 0.654 and an R Square value of 0.427. This suggests that 42.7% of the variability in Stock Performance can be accounted for by Information Asymmetry. Conversely, bid-ask spread and volume traded show no statistically significant associations with stock performance, as evidenced by their coefficients (B = 0.000 and -2.859E-010, respectively) and corresponding p-values (Sig. = 0.297 and 0.427, respectively).In contrast, stock volatility emerges as a noteworthy predictor, with a positively significant relationship (B = 0.103), signifying a 0.103 change in stock returns for a one-unit change in volatility. The low p-value (Sig. = 0.000) confirms its statistical significance. Conversely however, both market capitalization and the P/E ratio do not demonstrate statistically significant relationships with stock performance, as indicated by (B = 5.029E-007 and 1.500E-005, respectively) and associated p-values (Sig. = 0.672 and 0.154, respectively). In conclusion, the study provides empirical evidence of the varied effect of information asymmetry on stock performance at the Nairobi Securities Exchange. The findings emphasize the significance of stock volatility in influencing stock performance, while bid-ask spread, volume traded, market capitalization, and the P/E ratio do not demonstrate statistically significant relationships. Building on these findings, the study offers several recommendations. Firstly, market participants are advised to maintain a keen awareness of the impact of share volatility on stock performance, recognizing that investments in stocks with higher volatility may result in more favourable returns. Secondly, to address challenges stemming from information asymmetry in Nairobi Securities Exchange, it is crucial to enhance market transparency through the real-time dissemination of corporate news and financial disclosures, thereby levelling the playing field for all investors. Lastly, regulatory bodies should strengthen oversight, imposing strict penalties for insider trading and market manipulation to discourage unethical practices. Moreover, maintaining stringent standards for corporate disclosures and governance practices is essential to ensure that listed companies provide comprehensive and accurate information. In addition, prioritizing investor education initiatives is necessary, empowering investors with the skills to critically assess information. Promoting independent research and analysis, encouraging institutional participation, and facilitating whistle-blower protection are vital steps in promoting market integrity.