An Investigation Into Stock Market Reaction to Covid-19 Pandemic: a Case of Shares Listed at the Nairobi Securities Exchange

Abstract

COVID-19 began as a health emergency and rapidly deteriorated into an economic, financial, and social crisis. It has impacted every sector of the economy and has harmed the majority of the population in various aspects. The purpose of this study was to ascertain the stock market reaction to COVID-19 by examining companies listed in the Nairobi securities exchange. To accomplish the research objectives, the research concentrated on price reaction through the use of daily stock returns. The research was based on the EMH hypothesis, which states that an efficient market quickly absorbs and reacts to new information, it also considers the behavioural finance theory in the human reaction. The research employed an event-based technique. The event period was 61 trade days, including the event day, from 29th January to 27th April 2020, with the event day being 12th March 2020, the day the first case of COVID- 19 in Kenya was confirmed. The research used the NSE 20-share index as the market return benchmark. According to the study's findings, the market reaction was negative following the incident, but there were positive abnormal returns in the days preceding the disclosure. As indicated by the negative cumulative returns that are statistically significant, it was established that COVID-19 had a detrimental effect on stock returns. The CAAR has a pvalue of (.000), which is less than the 5% level of significance. The greatest influence was detected during the event period, which lasted several days before and after COVID-19. According to the study's conclusion, COVID-19 are extremely relevant information events that are followed by big negative anomalous returns. According to the data, share prices suffered a significant decline. This rebuts the EMH's claim that markets are inefficient. In practice, the findings show that when investors make investment decisions, they should consider elements other than economics. An investor makes an investment decision based on the available information. The information flow in the capital market is affected by the state of the environment, whether economic or otherwise. While the non-economic environment is not inextricably linked to capital market processes, it cannot be separated from them. Stock prices are affected by a variety of market events. These phenomena manifest themselves in a variety of ways. Although the COVID-19 pandemic is a onetime event that does not occur annually, a pandemic can hit at any time, causing havoc on the stock market. It is advised that businesses, shareholders, regulatory bodies, and governments work cooperatively during times of crisis to expedite the market's recovery.