The Effect of Fiscal Policy on the Performance of the Nairobi Securities Exchange

Abstract

The aim of this descriptive and correlational study was to determine the relationship between fiscal policy and performance of the Nairobi Securities Exchange. The performance measure of the Nairobi Securities Exchange used was the NSE 20-Share Index which was regressed against the fiscal policy instruments including government revenue, government expenditure and government debt expressed as percentage of the GDP. The period of the study was ten years from January 2004 to December 2013. The study employed monthly secondary data which was obtained from the CBK, Kenya National Bureau of Statistics and NSE. Data were analyzed using the Ordinary Least Square method which assumes linearity between the dependent variable and the independent variables and the analysis technique was multiple regression aided by research software ‘eviews’ version 7. The study found out that performance of the stock market is influenced by the Government’s fiscal policies. Government expenditure and revenue had positive effect on stock market performance as both are indicative of the economic performance and the former reflect micro and macroeconomic consideration and direction of the Government. Government debt had low positive effect on stock market performance with a negative cumulative effect as its long-term use poses risk of inflation owing to interest rates on debt. These findings confirm the researcher’s priori expectation that government fiscal policy actions significantly affect stock performance. The rest of the paper is organized as follows: chapter one covers introduction by addressing issues related to background of the study, statement of the problem, study objective and the significance of the study; chapter two focuses on literature review; chapter three is about the research methodology; chapter four covers data analysis, results and discussion; and lastly chapter five addresses summary, conclusion and recommendations.