Influence of Stock Market Liquidity on Performance of Stocks of Firms Listed in Nairobi Securities Exchange in Kenya

Abstract

The stock market in Kenya plays vital role in intermediation between borrowers and lenders hence uncertainty in the market impacts negatively to the economy. Unfortunately, the stock market has not been performing well. The study, therefore, sought to investigate the influence of stock market liquidity on the performance of stocks of firms listed on the Nairobi Securities Exchange. Specifically, the study aimed to: determine the effect of market depth, market breadth, market resilience and market immediacy on the performance of stocks of firms listed in the Nairobi securities exchange in Kenya. The study was guided by liquidity preference theory, trading cost theory and trading volume theory. A survey research design was applied and the study targeted 65 companies listed on the Nairobi securities exchange and the sample was 20 firms that make up the NSE 20 Share index for a period ranging from 2014-2018. Secondary data was collected using a data collection sheet for a period from January 2014 to December 2018. Monthly data on stock market liquidity aspects and stock performance was obtained from the NSE website. It was then averaged annually. Data was analyzed based on the research objectives using Statistical Package for Social Sciences (SPSS vs 24) and results generated using descriptive and inferential statistics. Descriptive statistics included means and standard deviations to describe the characteristics of the study variables. Inferential statistics included correlation and regression analysis to establish the relationship between the study variables. Hypotheses testing was done using regression results. Findings indicated that individually, market depth, market breadth, market resilience and market immediacy had a direct and significant effect on stock performance. Further, a combination of the stock market liquidity components also yielded a positive and significant effect on stock performance. The study concluded that market breadth best explains stock performance, followed by market resilience, market depth and lastly market immediacy. Based on the findings, the study recommended that the government should find ways of regulating the security market and ensuring that market remains liquid. This will build investors’ confidence and lead to improved stock performance. Management of various firms should find ways of raising finance, make best investment and financing decisions using the security exchange. The management should also come up with ways of increasing their liquidity and stabilizing their stocks in order to attract investors. The capital markets development authority should educate people on how the security market operates and how best the public can take advantage of the market to make favourable returns on investments.