The relationship between liquidity and stock ownership patterns at the Nairobi Stock Exchange

Abstract

The relationship between liquidity and stock ownership patterns is a subject that has taken center stage in most advanced capital markets like the New York Stock exchange. This concern heightened the need to determine how ownership patterns impacts on a stock's liquidity at the Nairobi Stock Exchange (NSE) regardless of the differences in market microstructure between the advanced capital markets and an emerging capital market like the NSE. Specifically, this research sought to achieve two objectives; firstly, to document the ownership patterns and liquidity of stocks listed at the NSE. Secondly, to determine the relationship between stock liquidity and stock ownership patterns traded at the NSE. To achieve the results, simple regression analysis was used to test the various parameters that helped in evaluating the relationship between liquidity and stock ownership patterns. The results of this study support the fact that there is a positive relationship between liquidity and shares outstanding, number of shareholders, public ownership as well as liquidity and foreign ownership. These results conform to theory as regards the nature of liquidity and shares outstanding, number of shareholders, public ownership as well as foreign ownership. Contrary to theory, this study finds a positive relationship between liquidity and insider ownership as well as a negative linkage between liquidity and financial/government ownership. The differences in results is an indication of the differences in market microstructure and imperfections at the NSE. However, the conclusions in this research should be understood in light of its limitations relating to limited availability of data at the NSE, the drawbacks of the least square methodology used as well as the time frame chosen for the study. In spite of the lack of theoretical framework that allowed the study to assemble all plausible arguments into a coherent theory in Kenya, thorough investigation of the relation between the ownership patterns and stocks liquidity showed that stock liquidity cannot be isolated with the aggregate impact of stock ownership patterns at the NSE.