Stock Price Reaction to Changes in Capital Adequacy Regulation in the Kenyan Banking Sector

Abstract

The reaction of stock prices to changes in capital adequacy has been examined and surveyed in this research. Past studies have found out that the announcement of regulatory change is viewed by market participants as generally unfavorable. The objective of this study was to investigate the impact of stock price reaction to changes in capital adequacy regulation in the Kenyan banking sector. The study found out that capital adequacy announcements leads to underperformance of stocks in the market as they had negative cumulative abnormal return values especially in the post announcement dates. The negative performance of the stock is indicated by a mean AR value of -0.0062. In addition, the variability in stock prices increased erratically with time though there is more variability in the days preceding and after announcement. The study concludes that the market reacts negatively to the capital adequacy announcements as the market returns were negative in values though the magnitude of the abnormality was not high. This also implies investors dislike for capital adequacy regulations in the market. The study further concludes that the market does not regard individual stock market highly than another in their analysis of capital adequacy announcement as they all had positive and negative returns. The study recommends that investors should not solely use capital adequacy announcement to make investment decisions as that would not make them have an above normal returns since the market digest the same information in almost a similar way. The study recommends that, other studies should be done to determine the actual challenges and banks’ annual performance in the year of capital adequacy announcements.