The Effect of Bond Issues on the Stock Price Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

The corporate bond market in Kenya currently accounts for barely 10% of all bond transactions at the Nairobi Securities Exchange. The objective of this study was to establish the effect of bond issues on the performance of the stock price of firms listed at the Nairobi Securities Exchange. Toward this end, the various measures of stock price performance were explored in an effort to highlight the possibility of bond issues as being another source of information to the market, which could have an effect on share prices. A descriptive analysis was carried out and the event study methodology employed to investigate this relationship. The market model was used to estimate the market returns which were used to calculate the abnormal returns of each company’s stock on every trading day. The findings obtained were the result of the parametric t-test carried out at a 5% significance level, which revealed outcomes that pull in either direction with regard to the objective of this study, i.e. where bond issues have a positive effect on the share price of the issuing company and where the bond issues have a negative effect or no effect at all. With this outcome, an actionable recommendation for further studies would be the use of cumulative average abnormal returns instead of cumulative average returns. Policy and practice could also put the findings of this research to use by encouraging the issuance of corporate bonds by firms, amongst other interventions highlighted later in the paper.