Effect of Bank Failures in Kenya on Stock Returns of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

The study was as a result of the banking crisis experienced in Kenya. The main objective was to identify the effect of commercial bank failures on the stock returns of commercial banks listed at the Nairobi Securities Exchange. The secondary data for analysis was gathered from the ten commercial banks listed at the NSE. The study was an event analysis of the failure of Chase Bank that was announced by the Central Bank of Kenya on 7th April 2016. The study analyzed the reaction of stock returns of ten listed commercial banks ten days before failure of Chase bank and ten days after the failure. Data analysis was done with the aid of Microsoft’s Excel (2013). T-test was conducted to establish the significance of the bank failure effect on stock returns. The conclusion derived from the study was that bank failure has a negative effect on stock returns of commercial banks listed at the NSE. The study also concludes that the stocks of listed commercial banks are highly sensitive to bank failures and react immediately to any bank failure announced by the Central Bank of Kenya. This implies bank failure information announced by CBK is very useful when valuing the securities. Besides that, no investors made any abnormal profits following bank failures. The study further concludes that no commercial banks stocks react swiftly to any bank failure information. The study therefore recommends that Central Bank of Kenya should come up with stringent rules and regulations of the banking sector to prevent pains and mass withdrawals that lead to bank failures which in turn results to loss for stock investors