The Effect of Intangible Assets Intensity on Volatility of Stock Prices for Firms Listed at the Nairobi Securities Exchange

Abstract

The objective of this study is to evaluate the effect of intangible assets intensity on the volatility of stock prices for firms listed at the Nairobi Securities Exchange. The study checks if the intensity of intangible assets in a firm‟s balance sheet affects the volatility of their stock price. In most cases, it is expected that intangible assets intensity would results to a positive effect on stock price volatility. The study relies on secondary data of 13 sampled publicly listed companies with data of up to five years from 2010 to 2014. These firms were randomly selected from five different industry groupings namely: banking, energy and petroleum, investments, information & telecommunication and manufacturing. The various analyses of these firms were computed from the data collected and extracted from their audited financial statements for the periods 2010-2014. The data was then analysed using linear regression models in excel to establish if there were any significant effect of intangible assets intensity on stock price volatility. From the results of the data set, the study shows a positive correlation between intensity of intangible assets and volatility of stock prices. However, results from the control variables, company size and debt had negative correlation between them and stock prices volatility. A possible explanation for this finding is the fact that intangible assets activities tend to increase the level of information asymmetry on projects and future earning for a firm and this in turn generates an increase in stock price volatility. Additionally, the findings could be attributed to the impact of uncertainty and expectation on the behaviour of investors in the Nairobi Securities Exchange market due to the increasing high level of intangible assets investment going at NSE. Although, intangible assets intensity had a positive effect on the volatility of stock price at the NSE, the results were inconclusive. The study therefore recommends that further research should be conducted with more details on the specific types of intangible assets like goodwill, R & D, intellectual capital while other variables which were not factored in and identify which are the major factors that affect volatility of stock prices for firms listed at the NSE. This will enable them to control these factors to ensure sustained improvement on stock prices for firms listed at the NSE. In order that we find more reliable and accurate results, the study further recommends that company managers review the existing methods of recognizing and recording intangible assets which would be a step towards a more broad understanding of the effect of book value of intangible assets on the volatility of stock prices.