The mediating effect of trading activity on the relationship between market information risk 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. The objective of the study was to determine the mediating role of trading activity (TA) on the relationship between market information risk (MIR) and price discovery (PD) for stocks listed at the Nairobi Securities Exchange and it was anchored on market microstructure theory. This study followed the positivist paradigm and was guided by correlational descriptive research design. The population for this study was all sixty six companies listed at the NSE with the unit of analysis being stocks trading at the stock market for the period of six months using 60 minute frequency intraday day data. Using the quantitative data, the hypothesis was tested using correlation and Hierarchical multiple regression analysis. The findings from Sobel tests found that the relation between the independent variable, MIR and the dependent variable, PD, was affected by the introduction of trading volume indicator of TA as a mediating variable. However, number of transactions did not mediate the relationship between MIR and PD. Trading activity based on the trading volume to number of transactions ratio composite was found to significantly mediate relationship. Market microstructure frictions play a central role in shaping the platform for risk sharing and price evolution. It is recommended that regulators should therefore aim at continuously designing stock markets that will facilitate efficient evolution of short-term equilibrium prices