The effect of financial innovations on stock returns of firms listed at Nairobi securities exchange

Abstract

Financial innovations have been applied for a long time in the developed markets, though it hit the local markets in the 80s. Financial innovations consists of something new that reduces costs, reduces risks, or provides an improved product, service or instrument that better satisfies financial system participants’ demands. The Kenyan financial sector has undergone tremendous changes in the last two decades with many reforms being undertaken in the sector, which has led to the proliferation of financial products, activities and organizational forms that have improved and increased the efficiency of the financial system. An example is the introduction of Central Depository System (CDS) accounts, automation of Nairobi Securities Exchange (NSE), Mobile banking and Money transfer services, agency banking among many others. These have increased the range of financing and investment opportunities available to economic agents by diversifying the way business is carried out, opening up new opportunities of business as well as promoting economic growth and social development. Many studies have been done, both local and global, to highlight the impact of financial innovations on financial sector and overall economic performance in emerging economies, however, no study has looked at the effect of financial innovations on stock returns of firms listed in the NSE, a phenomenon which the study hoped to determine. The study accomplished this by applying a descriptive research design on a population of all firms listed in NSE. The study relied on both primary and secondary data with a five year time period of 2009-2013. The study found the existence of a statistically significant relationship between financial innovations and the stock returns of the firms operating in the NSE. It was observed that product innovation and process innovation in conjunction with leverage and firm size have the ability to predict 58.1% of stock returns, to indicate a significant impact, though presence of other factors is probable, while institutional innovation was found to have no significant effect. The study recommends that firms should increase their usage of financial innovations among firms operating in the NSE. Further studies should be done to find out the other factors affecting stock returns in firms operating at the NSE and global studies expanding the scope of the current study would be recommendable.