Market Information Risk, Trading Activity, Organizational Characteristics and Price Discovery for Stocks Listed at the Nairobi Securities Exchange
Abstract
Besides being one of the yardsticks for assessing the quality of financial decisions by
management in the maximisation of shareholders wealth, stock markets around the
world provide unparalleled investment destination for investors. Consequently, the
structure and design of a financial market for stocks must continuously attempt to
discover efficient market clearing prices in order to attract investor who will then
initiate and continuously participate in the activity of trading. Asset pricing for
financial instruments trading in exchanges with unique trading mechanisms still
remains a widely debated issue in the discipline of finance because of its implications
for risk management, planning of consumption, portfolio decisions, and promotion of
societal welfare given microstructure frictions. The general objective of this study was
to determine the relationship among market information risk, trading activity,
organisational characteristics and price discovery for stocks listed at the Nairobi
Securities Exchange. The study was anchored on the information based market
microstructure theory. This study followed the positivist paradigm and was guided by
correlational descriptive research design. The population was all sixty six companies
trading at the stock market for a period of six months using sixty minute intraday data.
Using the quantitative data, hypotheses were tested using simple, stepwise and
hierarchical regression analysis and sobel tests. The study found positive and a
statistically significant relationship between market information risk and price
discovery. The findings from Sobel tests found that the relationship between
independent and dependent variable was affected by introduction of trading volume as
a mediating variable. However, number of transactions did not mediate the
relationship between market information risk and price discovery. Volume to
transaction ratio, a composite variable, was found to influence the magnitude and
direction of effect and as such, trading activity in general was found to be a mediator.
Further, the coefficient of the interaction term for ownership concentration and stock
return volatility was found to be significant thus confirming presence of moderation
effect. The findings supported the hypothesis that ownership concentration and stock
return volatility has a significant moderating influence. Based on the composite
variable, ownership characteristics were found to moderate the relationship between
market information risk and price discovery. The results also showed that when
considered together, market information risk, trading activity and organizational
characteristics independently showed significant variations in price discovery. Based
on the results, the regulatory regime and other stakeholders should aim at developing
appropriate policies in an attempt to design an efficient securities market to enable
market participants ease of access to information, enhance information content of
stock and improve the process of price evolution during trading. It is important to
introduce and adopt appropriate trading rules and mechanisms that improve the
intensity of trading activity and process with which efficient short-term equilibrium
prices are arrived at. The findings are expected to guide managerial practitioners and
participants in terms of appreciating the integration of the various price discovery
factors in the face of a challenging economic environment, and management of firm
core processes in order to support entrepreneur spirit in the country. The government
on the other hand has an obligation to provide stability of the economic environment
which provides organizational characteristics through interventions that support eases
market accessibility. It is recommended that other market microstructure studies
should be undertaken using other measures of price discovery like information share
and variance ratio. The study could also be replicated to cover cross listed stock and
other securities not considered in this study.
Publisher
University of Nairobi
Subject
Market Information RiskRights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1421]
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