Effect of Herding Behavior on Stock Market Liquidity at Nairobi Securities Exchange

Abstract

This study purposed to establish the effect of herding behavior on stock market liquidity at NSE. It effectively deployed a descriptive research design where the study population was all 65 firms currently listed at NSE. The study sampled firms that consistently appeared in the NSE 20 index between January 2017 and December 2022. The sampling technique was purposive as the sample was selected on the basis of individual judgment. Secondary data obtained from NSE included monthly data for equity turnover, market capitalization, NSE 20 index and closing prices of NSE 20 constituent firms. A linear regression model controlling for market returns was used. Turnover ratio, CSSD and NSE 20 returns were used to respectively proxy stock market liquidity, herding behavior and market returns. The study found that herding behavior and market returns were both insignificant predictors of stock market liquidity. Additionally, the explanatory power of the model as indicated by r-squared was found to be very low as it stood at 1.1%. This was an indication that stock market liquidity was largely influenced by other factors other than herding behavior and market returns. Diagnostic tests revealed that the model did not violate the assumptions of classical linear regression hence, the regression results were regarded reliable. On the basis of these findings, the study concluded that herding had no significant effect on stock market liquidity at NSE and recommended that measures implemented by NSE to boost market liquidity should be more informed by those factors proven to significantly affect market liquidity at the bourse.