Effect of Financial Statement Information on Idiosyncratic Volatility of Stock Returns among Listed Firms in Kenya

Abstract

Idiosyncratic volatility has always been ignored in asset pricing, this is due to capital asset pricing model’s suggestion that idiosyncratic volatility is diversified away since investors hold a proportion of the well diversified market portfolio. In reality however, this is not always the case. Studies have shown that investors do not always hold well diversified portfolios and idiosyncratic risk is priced to compensate investors for their inability to hold the market portfolio, therefore the main objective of the study was to establish the effect of financial statement information on idiosyncratic volatility of stocks return among listed firms in Kenya. Idiosyncratic volatility was the dependent variable while independent variables were earning per share, dividend per share, book value per share, cash flow and liquidity moderated by firm size. Correlational and descriptive research design were used, the study also used census technique and target all 39 listed companies that existed and their shares were actively traded at the Nairobi securities exchange NSE from 1998 to 2017. Descriptive as well as inferential statistics were generated. The study employed a dynamic panel data regression model, the analysis of variance (ANOVA) was used to reveal the overall model significance, the calculated F-statistic was compared with the tabulated F-statistic and a critical p-value of 0.05 was used to determine whether the overall model is significant. The study found out that there was a positive and significant relationship between earnings Per share and idiosyncratic volatility of stock returns among listed firms in Kenya. There was a positive and significant relationship between dividends Per share and idiosyncratic volatility. There was a negative and significant relationship between book value per share and idiosyncratic volatility of stock returns among listed firms in Kenya. There was a positive and significant relationship between Cash flow and Idiosyncratic Volatility of stock returns among listed firms in Kenya. There was a negative and significant relationship between liquidity and Idiosyncratic Volatility of stock returns among listed firms in Kenya. Firm size was revealed a good moderator on the relationship between financial statement information and idiosyncratic volatility. The null hypotheses was rejected. Based on the findings, the study concluded that earning per share, dividend per share, book value per share, cash flow and liquidity have a significant relationship with idiosyncratic volatility of stock returns among listed firms in Kenya. The study recommended for management in the listed firms to focus on earning per share, dividend per share, book value per share, cash flow and liquidity on their strategic decision-making. These indicators will further guide in expanding the interpretation of the financial dynamics in the listed firms at the Nairobi securities exchange and other related firms.