Determinants of the Corporate Bond Market in Kenya:1997-2004

Abstract

This study considers the short run relationship between macroeconomic variables and corporate bond market development for the Kenyan economy over the period 1997-2004. The aim of this study was to assess the effects of macroeconomic variables on the corporate bond market which are seen to impede the development of a market that is required to boost economic growth. Research so far has concentrated on weaknesses in market infrastructure, institutional constraints, firm characteristics and market characteristics of which is largely descriptive in nature. This paper identified and examined the relationship between macroeconomic variables notably exchange rate. interest rate and inflation rate as determinants to corporate bond market development to have dissuaded bond issuance by companies and also contributed to underdevelopment of a market that is required to boost economic growth. Also included is the variables bank credit, treasury bonds, equity returns as other determinants to corporate bond market development. To achieve the laid down objectives, the study adopted a short run time series linear econometric model to estimate effects and contribution of these variables as determinants of domestic bond market development. Other notable inclusions were the bank credit, equity and treasury market variables. The study finds that exchange rate. interest rate and bank credit variables negatively affect the development of the corporate bond market which calls for implementation of sound policies. The inflation. equity and Treasury bond variables show no significance despite the existence of theories explaining their roles and significance in bond market development.