An empirical investigation into the relationship between stock prices and the number of shareholders of firms quoted at the NSE.

Abstract

Empirical investigations on stock markets traditionally focus primarily on stock prices and their behavior over time. Based on the available set of information about a company, its stock price reflects investor's expectations on the future performance of that firm. The arrival of new information causes investors to adapt their expectations and is the main source of price movements.

This study has not been done in Kenya hence the need to establish the nature of the relationship between a firm's investor base and its stock price for firms listed on the NSE. The findings of this research will therefore bridge the knowledge gap that exists on this particular issue. The objective of the study was to investigate and document the relationship between stock prices and the number of shareholders of firms quoted at the NSE. More precisely, the study sought to establish the correlation between the two variables-stock prices and the number of shareholders

For purposes ofthis study the population was all the 48 companies quoted at the Nairobi Stock Exchange (NSE) (Appendix 1) over the period 1997-2003.The study relied entirely on secondary data, which was obtained from the financial statements, and other records of companies quoted at the NSE. The data that was collected mainly comprise of yearly stock prices and number of shareholders for all the companies included in the study for the seven-year period 1997-2003.

The findings in this study show a negative relationship which is not linear between the two variables stock prices and number' of share holders hence it is contrary to what Merton found out that an increase in the number of investors holding a security should increases the company's value. Companies with the highest number of shareholders tend to report some of the lowest stock prices over the years under study holding other factors constant.