Effects of Election Period on Stock Returns At The Nairobi Stock Exchange

Abstract

The relationship between election period and stock returns was examined. The political policy theories suggest that the social moods of the society are reflected in the performance of the stock markets. These actions are motivated from the fact that the political happenings affect the economy and the stock market. The study has achieved the objective by establishing that Nairobi Stock Exchange exhibit election effect on the securities traded there. The study found out that as the general election is nearing, the stocks mean returns fluctuate downwards until election period then on the upward trend afier the election. The population of study constituted 40 companies that have been trading at the Nairobi Stock Exchange between the periods 1997 to 2003. The study picked secondary stock prices, dividends and bonus issues and adjusted the mean returns for six months before election, election month and six months after election. The hypotheses were tested for the mean difference in stock retums using “t”-test which resulted into significant statistical difference in the mean returns. Correlation coefficient was then used to test the volatility in stock retum between the two periods which resulted into a weak correlation of 22%. Other studies reviewed in the literature review concurred with these findings that election as apolitical factor has effect on stock retums. The study recommends that the investment advisors and financial analysts should have an in-depth study of political and other social factors and their effect on stock returns. The study further suggests that behavioral finance should be introduced in the finance curriculum.