Stock Market Reaction to Presidential Election Results Announcement in Kenya: a Look at 1997 - 2013 Elections

Abstract

Stock markets in the world individually and collectively play a critical role in their economies. They provide an avenue for raising funds, for trading in securities including futures, options and other derivatives which provide opportunities for investors to generate returns. The main objective of this study was to investigate how stock market react to presidential elections result in Kenya. The study adopted an event study methodology and the population of this study was 60 companies listed in the NSE. The study used secondary data to gather information. Data obtained from the NSE covered the period before and after 1997, 2002, 2007 and 2013 presidential results announcement. The collected secondary data was coded and entered into Statistical Package for Social Sciences (SPSS, Version 20) for analysis. The analysis involved evaluation of abnormal returns. The stock prices returns around the presidential election results announcement were analyzed by comparing them against the average return before the elections announcement. Summary statistics for the stocks were analyzed by looking at the mean, minimum and maximum. The study found that the presidential election results experienced a high abnormality during announcement and days surrounding the announcement. It was also found that it takes time for information on presidential election results to be fully absorbed in the market. It was also established that stocks performed poorly than the market in periods after announcement than before the announcement. The study concluded that there is an increase in stock returns in response to presidential election results announcement where there is a favorable regime change. The average cumulative abnormal returns exhibited a reducing trend following announcement and a sharp increase before announcement. The study, thus, recommends that Capital Market Authority (CMA) to stem market variability that might rise to the magnitude of panic buying or selling following presidential results announcement by invoking ‘fuse-breakers’. This study had some limitations in that the announcement of the presidential election results may have been affected by other market anomalies such as the Weekend and Monday effect. Macroeconomic performance such as inflation and environmental factors such as politics may have also moderated the effect of these events. These factors could not be isolated in the study due to difficulty in doing so.