FACTORS AFFECTING THE DEVELOPMENT OF STOCKMARKET IN EMERGING ECONOMIES: A CASE STUDY OF NAIROBI STOCK EXCHANGE

FACTORS AFFECTING THE DEVELOPMENT OF STOCKMARKET IN EMERGING ECONOMIES: A CASE STUDY OF NAIROBI STOCK EXCHANGE

ABSTRACT

This study examined the factors that affects capital market development specifically the case study of Nairobi Stock Exchange. It covered the period of 2005-2010 for companies listed on the stock market. In spite of the government trying to provide an enabling environment for stock market development in Kenya there has been development compared to other emerging stock market in developing countries. This shown by low turnover ratio, low market capitalization to GDP ratio and low value of stock traded to GDP ratio. Hence this study was focused on finding out the factors that affect stock market development in Kenya especially the NSE in particular. 

A case study design was used to find out the factors that affect stock market development. Methods used to analyze data was regression and descriptive approach and secondary data was the method of data collection used. The study found out that external factors such as macroeconomic stabilization and social factors and market (legal, regulatory and institutional) factors which have limited stock market development. But some variables did not show any relation to the above relationship particularly inflation and foreign capital inflow. So it can be said that capital market development is influenced strongly by stock market liquidity, institutional quality, income per capita, domestic savings and bank sector development. 

After analyzing the data using regression analysis it was established that 85% stock market development: stock market liquidity, bank sector development, private capital inflows and macroeconomic. This study recommends that Nairobi Stock Exchange needs to be developed further to enhance resource mobilization. Moreover policies also affect stock market development such as regulation of institutional investor and privatization need to be addressed. The government and policy makers should reduce impediments to stock market development by easing private capital inflows into the country. The Capital Market Authority (CMA) should play a role that is conducive to stock market than it heavy handed role

Table of Contents

DECLARATION2

ACKNOWLEDGEMENT3

ABSTRACT4

CHAPTER ONE7

INTRODUCTION.7

1.1 BACKGROUND OF THE STUDY7

1.2 THE PROBLEM STATEMENT9

1.3 OBJECTIVES OF THE STUDY10

1.3.1 SPECIFIC OBJECTIVES OF THE STUDY10

1.4 SIGNIFICANCE OF THE STUDY10

1.5 LIMITATIONS OF THE STUDY11

1.6 SCOPE OF THE STUDY11

CONCEPTUAL FRAMEWORK12

CHAPTER TWO14

2.1 Development of the stock market14

2.2 Importance of stock market16

2.3 Empirical evidence on factors affecting the development of stock market18

2.3.1 Legal factors18

2.3.2 PUBLIC KNOWLEDGE OF STOCK MARKET OPERATION19

2.3.3 TRANPARENCY OF TRANSANCTION20

2.3.4 MARKET OPENNESS20

2.4 SUMMARY OF LITERATURE REVIEW21

CHAPTER THREE22

3.0 INTRODUCTION22

3.1 Model specification22

3.2 RESEARCH DESIGN22

3.3 TARGET POPULATION23

3.4 DATA COLLECTION23

3.5 MEASURMENT OF VARIABLES23

3.6 DATA ANALYSIS24

CHAPTER FOUR26

4.1 INTRODUCTION26

4.2 Statistics Statistic Variables26

4.2.1 Stock Market Development27

4.2.2 Market Capitalization Ratio28

4.2.3 Foreign Direct Investment28

4.2.4 INCOME LEVEL29

4.2.5 Savings and Investments30

4.2.6 Macroeconomic Stability31

4.2.7  Stock Market Liquidity32

4.3.1 Correlation Analysis: Pearson Correlation33

4.3.2 Regression Analysis and Interpretation of the Findings33

CHAPTER FIVE38

5.1 INTRODUCTION38

5.2 Conclusion and Recommendations40

5.3 Limitations of the Study42

5.4 Suggestions for Further Research43