The Effect of Political News on Stock Market Returns in Kenya: the Case of March 2013 General Elections

Abstract

The study was carried out to establish the effect of political news on stock returns in Kenya. The objective was to establish the effect of the March 2013 general elections on stock returns for companies listed at the Nairobi Securities Exchange. The study sampled the counters constituting the 20 share index owing to their 80% contribution to total volumes trading at the NSE. Out of the 20 counters, CMC holding Ltd was under suspension during the study period and was therefore omitted in the sample, which consequently consisted of 19 counters. The study was based on event study methodology and employed the market model to estimate the expected returns, consequently leading to the computation of abnormal returns. The event day was 4th March 2013. The estimation window was 120 days prior to the event window which comprised of 60 trading days prior to the event day and 60 trading days after the event date. During the event day, the Nairobi Securities Exchange remained closed. The study findings were consistent with previous studies where stock prices were reported to react to political news. Volatility was noticed in stock prices in the short term to the election date with stock prices steeply rising around the election date. On average, the stock prices recorded an ascend movement around the event date and after the election signifying investor confidence in the incoming government. This signifies the confidence of investors in the new constitution dispensation which brought into effect devolved governments after the election date. As opposed to a previous study by Murigi (2008), the average abnormal returns remained positive before and after the event date with continued rise in stock prices after the event date. However, despite the recorded shift in stock returns, the abnormal returns for 17 counters out of the 19 sampled were not statistically significant, a matter that should be investigated in future studies. The implication of the study findings is that investors should take precautions when purchasing stocks during periods of political uncertainty.