The effect of general elections on stock prices for firms listed in the Nairobi securities exchange

Abstract

The relationship between information flow and asset prices behaviour is a key topic in finance. In this project, the ojective was to investigate the effects of political events on the stock market performance at the Nairobi Securities Exchange (NSE). In particular, the study examined whether political-related events mainly the national general elections and their results contain information regarding the changes in prices and volatility at the NSE.Several theories were applied and used to bring out the issue of information flow and stock price volatility. The study was based on a political variable (general elections) event study methodology to establish the behavior of the NSE performance around the sample period, 1997 to 2013. The population of this study comprised of all the firms trading at the NSE in the above period. As per the records at the Nairobi Securities Exchange, there were 61companies listed by March 2013. The period studied cut across beginning the second election held in Kenya under the multiparty rule in 1997, first regime change of 2002, the turbulent election period of 2007 and a second regime change election event of 2013. The study found that the NSE 20 share index exhibited seasonality over the months from the year 1997 to 2013. The findings concluded that market reaction to elections is highly negative or positive depending on the election being analysed. The information content in the general election is therefore useful for valuing the securities in the markets.These findings have important implications for the optimal strategies of risk-averse stock market investors.