Relationship between liquidity and return of stock at the Nairobi securities exchange

Abstract

The objective of this study was to ascertain whether there exists a relationship between liquidity and return of listed firms at the Nairobi Securities Exchange. The research design was correlational and the population of the study consisted of all the 57 firms currently listed at the Nairobi Securities Exchange. The sample consisted of 41 firms which were listed between the years 2007-2011, secondary data for the period was collected from NSE data bank. Purposive sampling of companies quoted on the NSE during the period 2007-2011 was carried out with exclusion in the sample of firms that were listed in the course of the study period and those which were suspended. Turnover rate was used as a proxy for liquidity. It was computed as monthly trading volume divided by the number of outstanding shares issued then expressed as a percentage. Monthly return for each security was determined as sum of capital gains/losses and dividends expressed as a percentage of the beginning of period investment value. Simple regression model was used for the purpose of analysis to determine the nature of the relationship. Correlation coefficient „r‟ value for Liquidity and return of stock was found to be small. This showed that there was a very weak correlation between Liquidity and return of listed firms at the Nairobi Securities Exchange. It was concluded that there is a non-linear relationship between Liquidity and the Return of listed firms at the Nairobi Securities Exchange. However, it is recommended that studies should be undertaken to determine other factors that might influence Return of firms other than Liquidity.