Effect of Financial Liberalization on Stock Market Returns at the Nairobi Securities Exchange

Abstract

Financial market reforms aim to improve the financial system of a country. These reforms should, in particular, include policies that should induce higher stock market returns. Most of the relevant literature has proposed that financial liberalization creates financial market efficiency, thereby generating savings, investment and higher returns. The objective of this research was to determine the effect of financial liberalization on stock market returns at the NSE. The study was based on financial liberalization theory, market microstructure theory and trading cost theory. The independent variable was financial liberalization while the control variables were; interest rate, inflation and public debt. The dependent variable that the research attempted to explain was stock market returns at the NSE. The data was obtained on a quarterly basis for a duration of ten years (from January 2013 to December 2022). A descriptive research approach was utilized in the research, with a multivariate regression model utilized in examining the link between the research variables. The research findings depicted a 0.596 R-square value, signifying that the selected independent variables can describe 59.6 percent of the variance in stock market returns at the NSE, whereas the other 40.4 percent was attributable to other factors not surveyed in this research. The F statistic was significant at a 5% level with a p=0.000. This proposes that the model was satisfactory for explain stock market returns at the NSE. Further, the results demonstrated that financial liberalization had a positive and significant influence on stock market returns at the NSE. Interest rate and inflation had no significant influence on stock market returns at the NSE. Public debt had a significant negative influence on stock market returns at the NSE. The study recommends the need for practitioners and policy makers to ensure that the level of financial liberalization keeps on improving as this will enhance stock market returns in the country. Policy makers should also aim at developing policies aimed at ensuring sustainable public debt as this is an important determiner of stock market returns. Future studies can focus on other determinants of stock market returns at the NSE.