The effect terrorist attacks on the stock performance of insurance companies listed in the Nairobi securities exchange

Abstract

The stock market is a very critical ingredient to the economic development of a country as it facilitates the flow of funds for business and provides an investment opportunity for the investor. The massive contribution done by the insurance and financial sectors to the growth of the Kenyan economy is one that cannot be ignored. However, rising cases of terrorism attacks seems to threaten the stability and performance of these sectors either directly or indirectly. Since late 2011, Kenya has seen an upsurge of violence both in form of terrorist attacks and internal intercommunity violence. The objective of the study is to establish the effect of terrorist attacks to the stock performance of insurance companies listed at the Nairobi Securities Exchange. The study was conducted using the event study methodology and data analysed using excel. The results were presented in tables, figures and appendices. The study suggests that a more robust research on terrorism and the insurance sector performance especially in emerging markets is necessary in order to draw a conclusion. The results showed that Abnormal Returns (AR) increased slightly for the three events under study. Significance tests on these results showed that that they were significant at 5%. An analysis of the CAR for the three events showed that there existed a positive relationship between terrorist attacks and insurance company stock performance. One day after the event, the CAR for events 2 and 3 increase steadily to 4.23% and 5.2% respectively at the 10th day. From the study, it can be observed that contrary to the general assumption that terrorist attacks affect the stock market negatively, investors in the insurance sector may not loose as well. The study also recommends the inclusion of insurance stocks in portfolio management strategies as well as the increased marketing activities by insurance companies especially on terrorism insurance.