Relationship Between Changes in Stock Prices and Changes in Management: Evidence From Nairobi Securities Exchange

Abstract

Stakeholders use amongst other measures, stock prices to gauge performances of firms, and consequently, performances of management. The study aimed at establishing the relationship between changes in price and change in management at the Nairobi Securities Exchange. The study further aimed at establishing the nature of such relationship if any. Studies establishing relationship between changes in stock prices in developed countries gave conflicting results. Similar studies conducted in Kenya, a developing country with unique set of operating environmental factors did not adequately address the aspect of relationship between changes in price and change in management at the Nairobi Securities Exchange and hence the need for study in this area. Out of a total of 54 companies listed on the Nairobi Securities Exchange as at 2nd January 2001, a sample of 37 companies met the criteria for inclusion. Data relating to persistent changes in stock prices and changes in the management was collected from Nairobi Securities Exchange, Capital Market Authority and financial reports of firms. A longitudinal study was used to evaluate the relationship between changes in stock prices and change in management at the Nairobi Securities Exchange. A logistic regression model was used to explain the relationshi p between a dichotomous response variable (change in management) and a categorical predictor variable (stock price). The Wald Test was used to test the significance of the relationship between changes in price and change in management. The study showed that the relationship between changes in price and change in management was significant. Further the study showed that a unit fall in stock price increased the log odds (logit), the odds and the probability of change in management. Conversely, a unit rise in stock price decreased the log odds (logit), the odds and the probability of change in management. The study concluded that a relationship between change in stock prices and change in management existed in the Kenyan market, that is, the Nairobi Securities Exchange and that the relationship was an inverse relationship. The study recommends that Nairobi Securities Exchange and Capital Market Authority put in place mechanisms to ensure data accessibility, that reasons for varied reactions time wise to changes in stock price by different firms be analyzed and that Nairobi Securities Exchange and Capital Market Authority compel firms to give reasons for all management changes carried out at anyone particular time. The study suggests further studies to investigate causes of changes in management in cases where stock prices do not change as well as investigate if time is a significant variable in explaining change in management