Effect of Investor Behaviour on Stock Market Reaction in Kenya

Abstract

Nairobi Securities Exchange has witnessed cases of stock market reactions as a result of extreme price volatility which point to the possibility of underlying inefficiencies which impacts on the shareholder value. Such market reactions are as a result of irrational investor behavior leading to market inefficiencies. The main objective of the study was to determine the effect of investor behavior on stock market reaction in Kenya. Specifically, the study determined the effect of herd behaviour on stock market reaction in Kenya; determined the effect of loss aversion on stock market reaction in Kenya; determined the effect of mental accounting on stock market reaction in Kenya; and determined the effect of overconfidence on stock market in Kenya. Empirical studies on the effect of investor behaviour on stock market reaction are inconclusive especially in the Kenyan setting. The research gap therefore was to determine the effect of investor behavior on stock market reaction in Kenya. The target population was 67 listed companies at the Nairobi Securities Exchange. A sample of 48 listed companies was used in the analysis. Secondary data extracted from NSE historical data on stock prices, volume traded, turnover, number of deals and dividend yield of listed companies for the period 2004 to 2016 was used in the analysis. The study sampled companies that had been listed for at least three years prior to the date of analysis. This was to enable the research to deal with dynamics of time components and to capture investor behaviour variables and stock market reaction in Kenya. This led to unbalanced data and this was a limitation in this research.The study adopted quantitative research design. The descriptive statistics revealed that the variables were normally distributed. The unit root results showed that all the variables were stationary. Pair-wise correlation showed that there was no multicollinearity problem between variables. Panel data regression was adopted. Random Effect Model (EGLS) estimation was effective to explain the objective in this study. The regression coefficients showed that overconfidence and loss aversion variables had a negative statistically significant effect on stock market reaction; herd behavior variable had a positive statistically significant effect on stock market reaction; whereas mental accounting variable had a negative statistically insignificant effect on stock market reaction in Kenya on Random Effect Model EGLS. In conclusion, the null hypothesis was rejected for herd behavior, loss aversion and overconfidence variables because the variables had a significant effect on stock market reactions in Kenya. However, the null hypothesis for mental accounting behavior variable was accepted. This was because mental accounting variable had an insignificant effect on stock market reaction using the EGLS Random Effect Model. Recommendations to CMA are to provide measures to attract more companies to list in NSE to enhance liquidity and efficiency and regulate dominant players to ensure fair competition. Recommendations to NSE are to increase information efficiency by monitoring and improving the trading system, improve the modelling of stock prices and reflect information flow and factor in some behavioural factors and improve on transparency and investor confidence in the stock market. Recommendations to investors were to assess the market sentiments, get information on the fundamental prices of listed stocks, assess the market to identify whether it is bullish, bearish or cattish and look out for bubbles in stock prices.