The Announcement Effect of Capital Gains Tax on Stock Performance at Nairobi Securities Exchange

Abstract

Shareholders returns are in form of dividends issued and the capital gains realized from the sale of investments. Capital gains tax is levied on the capital gains realised by investors on sale or transfer of chargeable assets such as marketable securities. It was expected that investors will react to any news that will affect them. In an efficient market security prices adjust immediately and fully to reflect all available information both public and private. In Kenya CGT had been suspended in 1985 to encourage investment in the real estate sector as well as spur growth in the securities exchange. It was later announced to be reintroduced through Kenya Gazette Supplement No. 141 on 19th September 2014 to be effective on 1st January 2015. However, it was not implemented. Thus this study sought to assess the announcement effect of capital gains tax on stock performance at Nairobi Securities Exchange. Daily stock prices for the 57 sampled stocks and the daily NSE 20 Index was extracted from the NSE database and analysed using Ms Excel and SPSS. The study adopted the event study metrics consisting of 31 days as the event window i.e. 15 days before the event day and 15 days after. The study adopted descriptive design method. Abnormal returns for each stock and the AAR for each day were calculated and aggregated to obtain. CAAR. Paired t-test of significance was calculated. AAR increased after the announcement of CGT. There was a difference in the performance of the stocks before and after the announcement. The study concludes that the announcement of capital gains tax had a positive effect on the performance of stocks at the Nairobi Securities Exchange.