Effect of Exchange Rate Fluctuations on Market Capitalization at the Nairobi Securities Exchange

Abstract

Market capitalization is an important measure for investors in the determination of the returns on their investment. Day-to-day stock price fluctuations provide freely available information on the health of a publicly traded company. Exchange rate fluctuations affect operating cash flows and firm value through translation, transaction, and economic effects of exchange rate risk exposure. The Kenya shilling has registered mixed performances against the USD. These fluctuations tend to increase market capitalization risk. In the Monetary Policy for Fiscal year 2011/2012, CBK attributed the appreciation of the Kenya shilling to the tight monetary policy stance adopted by the Monetary Policy Committee. In addition, the disbursements from the IMF through the Enhanced Credit Facility programme towards the end of 2011 and the disbursement of USD 600 millionsyndicated loan to the government provided a further cushion to the Kenya shilling. Exchange rate fluctuations affect policy makers as well as investors hence the need to study fluctuations, which can aid in financial decision-making. This study sought to examine the the effect of fluctuations in exchange rate on market capitalization at the Nairobi Securities Exchange. The study was a descriptive case study. The study used secondary data collected from the Nairobi Securities Exchange. The study used monthly average market capitalization for the period 2012 to 2014. The market capitalization was obtained by computing the monthly market value of outstanding shares for all the 61 firms, listed at the Nairobi Securities exchange, for the period 2012 to 2014. The study conducted a regression analysis to establish the extent of relationship between fluctuations in exchange rate and market capitalization. The study carried out a T-test at 95% confidence level to establish the significance of the independent variable in explaining the changes in the dependent variable. From the findings, it was clear that there was positive correlation between the variables total market capitalization and monthly exchange rate fluctuations (0.774). It was established that all the independent variables had a significant contribution to the variance of the dependent variable at a significance level of 0.05. The relative importance of each of the independent variables was however different. Taking all factors (monthly exchange rate fluctuations, monthly average rate of inflation, monthly average interest rate) constant at zero, market capitalization will be 2921.680. The data findings also showed that a unit increase in monthly exchange rate fluctuations would lead to an 18.359 increase in market capitalization; a unit increase in monthly average rate of inflation will lead to a 55.809 decrease in market capitalization while a unit increase in monthly average interest rates will lead to a 10.241 decrease in market capitalization. In this study, a conclusion was drawn that the fluctuations in the exchange rate is a major determinant of the market capitalization at the Nairobi Securities Exchange. The study therefore recommends that the management of the firms should implement policies on growth of the market value of the firm during the periods of high exchange rate to enjoy the benefits that come with such seasons.