The relationship between capital market development and stock return of companies listed at the Nairobi securities exchange

Abstract

Capital markets play a significant role as market intermediaries by providing a link between savers and investors. This is made possible by a growing economy which requires additional financing from markets whereas savers have surplus funds for investments. This allows films to give their investors healthy returns from investing in projects in which without sourcing for investment funds could not be undel1aken. However, for the economy to grow as well as firms' returns and value there is a need for a vibrant stock market. Few studies have been done in Kenya to establish the relationship between the stock market performance and economic performance. However this study focused on the relationship between the capital market and stock returns. It therefore sought to establish the relationship between these two factors. In order to do this, the research was designed as an event study where events were tested i.e. Live Trading on the Automated Trading System (ATS) of the Nairobi Securities Exchange (NSE), implementation of a wide area network (WAN) platform, uploading of all government bonds on the Automated Trading System CATS) and movement of the equity settlement cycle from T+4 to T+3 cycle. The population comprised of companies listed at the TSE while the sample size was the companies forming the SE 20 Share Index. The findings of the study were that there is a positive correlation effect between stock return and capital market developments. The study concludes that there is a significant relationship between capital market development and stock returns. The study therefore

recommends for the need to ensure that NSE comes up with best regulations to enhance its capacity in a bid to develop the capital market.