The effect of bond issue on share prices of firms listed at the Nairobi Securities Exchange

Abstract

The corporate bond market in Kenya is still relatively underdeveloped. There seems to be a disconnect between the number of firms that show direct need for capital and the number of debt issues that are floated for this purpose. The bond market in Kenya currently accounts for less than 10% of all bond transactions at the Nairobi Securities Exchange. This study was undertaken with a view of establishing whether bond issue have an effect on the share prices of the firms listed at the Nairobi Securities Exchange for the years from 2009 – 2013. The objective of this is study was to determine whether bond issues generate abnormal returns and duration of abnormal returns of firms listed at the Nairobi securities exchange. The methodology used in the study is the event study methodology which seeks to identify any abnormal returns observed around the event day. Data extracted from NSE Daily stock and NSE handbook for the 2009 -2013 and was analyzed using Microsoft Excel with focus on comparing critical t-value with table t-value and was presented using tables and graphs. From the data analysis and resulting tables, all companies sampled had an eventful bond issue. The graphs confirm a turning point in residual around the date of bond issue for most of the companies. The findings are that significant movements in return were observed periodically, pre and post bond issue. Policy and practice could also utilize the findings of this research to use by encouraging the issuance of corporate bonds by firms, amongst other interventions highlighted later in the paper. Most of the shares posted negative abnormal returns around the bond issue dates which shows how share prices have reacted to the bond issue event. From the results obtained, recommendation for further studies would be the use of cumulative average abnormal returns instead of cumulative average returns.