Influence of Firm Financial Characteristics on Stock Return of Companies Listed in East Africa Securities Exchanges

Abstract

The dynamic interrelationship between firm financial characteristics and stock market returns have an influence on operations costs as well as the expected return at the end of accounting cycles. The effect of firm characteristics on stock return has been empirically examined with no conclusion due to mixed findings. Therefore, the current study investigated the influence of firm financial characteristics on stock return among companies listed in East Africa. Specifically, the study examined the influence of firm value, financial health, leverage, liquidity on stock return as well as the moderating effect of shareholders concentration. The study was based on agency theory, signalling hypotheses, information theory, Modigliani and Miller hypotheses and pecking order theory. The study adopted descriptive and correlation research design. Purposive sampling technique was used to select 51 listed companies in Kenya, 10 listed Uganda and 15 listed in Tanzania since 2007 to 2016. Panel secondary data was collected through use of document check index and the data was retrieved from annual financial statements. Data was analysed through use of descriptive and inferential statistics. Descriptive statistics included mean, standard deviations, skewness and kurtosis. Inferential statistics included correlation and regression modelling. Prior to modelling diagnostic tests that include normality, multicollinearity, autocorrelation, stationarity and granger causality were carried out. Firm value, financial health, liquidity and leverage had significant influence on stock return. Shareholders concentration had moderating effect on the influence of firm financial characteristics on stock return of listed companies in East Africa securities exchanges. It was concluded that there is need to develop measures to enhance securities trading in East Africa. The current study was limited to EASE. There is need for subsequent study to be carried and draw listed companies from Africa so as to increase the sample size. Further, there is need for inclusion of other firm financial characteristics in addition to firm value, financial health, liquidity and leverage. Moreover, future studies may consider fitting structural equation model or Feasible Least Squares Model while examining the effect of firm financial characteristics on stock return of listed companies in East Africa securities exchanges. In addition, longer panels should be considered and the effect of country specific characteristics be controlled for while examining the effect of firm financial characteristics on stock returns in East Africa securities exchanges.