An empirical analysis of the NSE response to cataclysmic events: a case study of Uchumi insolvency

Abstract

Without warning, the country's widely networked supermarket (Uchumi Supermarket) declared insolvency and closed shop on 1st June 2006. On 31 st May 2006, a day before uchumi threw in the towel, the company conducted a normal trading on the Nairobi Stock Exchange (NSE), selling over 1.6 million shares at a price of Kshs 14.50 per share. The objective of the study is to assess the impact of decline in fortunes in Uchumi Supermarket on performance of ordinary shares at the Nairobi Stock Exchange. The study is carried out by analyzing data which comprises daily prices and the derived daily returns for the period 1996 to 29th July 2006.The findings of the study indicate that liquidity and share prices of the listed firms were not negatively affected after Uchumi suspension. The mean return during the event window is lowest with a negative value while the estimation window and the post estimation window both show positive returns. The results have important implications because cataclysmic events have significant influence on liquidity and share prices and thence returns. The study recommends that a similar study with a bigger sample, time horizon and taking into account more cataclysmic events be conducted by using advanced time series models to enhance our understanding of the association between the cataclysmic events and share returns and liquidity of the NSE.