Signaling factors to investment decisions: an empirical study of Nairobi Stock Exchange

Abstract

One of the main objectives of firms is to maximize Profits. This study adopts Tobin's Q theory of investment and examines: the role of stock market as a signal to mangers in making investment decisions.The study aims at applying the theory empirically in Kenya. It goes further to examine the role played by Nairobi Stock Exchange (NSE) as a market for valuing quoted companies and usefulness to managers' choice of investment. Managerial perception is proxied by net sales, sales growth rate and companies cash flows. In this study, net sales have been used as a proxi for managerial perception. The study also examines the role of market perception in decision making, which is proxied hy q-ratio. Role of public expenditure in the investment decision is also examined. This study uses panel data of twenty-eight listed companies for a period of twelve years.In conclusion, market perception, managerial perception and public expenditures have been found to have a positive influence on investment decisions of firms. Out of the three factors, managers respond more to their own perception than both market and public expenditures. Market perception also seems to give a stronger signal than public expenditures.