The information content of treasury bill rates: The case of Nairobi Securities exchange

Abstract

The efficient markets theory stipulates that market prices fully reflect all available information. Market efficiency can be in the weak form, semi-strong form or strong form. Weak form efficiency refers to a situation where market prices fully reflect all historical information about a stock price. Semi-strong form efficiency refers to a situation where market prices reflect all historical and present information about a stock while strong-form efficiency refers to a situation where market prices reflect all historical, present and private information about a stock. This paper investigates the semi-strong form efficiency of the Nairobi Security Exchange by finding out the information content of Treasury bill rates. The study uses the Event Study methodology. Changes in the average 90-day Treasury bill rates represent the event under study. The event window comprises five days before and five days after the announcement day. Comparison or estimation periods of twenty eight before and after the event windows are used. The study from 2007 to 2013 included sixteen sampled companies shortlisted from the NSE 20 Stock index and considered ten events when the Treasury bill rate changed. This came to a total of one hundred and sixty events. Statistical analysis was carried out using Microsoft Excel and SPSS packages with T-test distribution being determined at 95% confidence level. Results of the study indicate that there is a statistically significant difference between comparison period returns and event window returns in thirteen of the sixteen sampled companies. However, graphs of Cumulative Abnormal Returns do not support patterns that indicate information content of Treasury both prior to and after the Treasury bill announcement date.