The Effect of Some Microeconomic Variables on Long- Run Capital Market Returns on Equity Offering Firms at the Nairobi Securities Exchange

Abstract

The purpose of the study was to evaluate the effect of some microeconomic variables on long-run return by firms which offer equity at the Nairobi Securities Exchange. To address this problem the study used seven specific objectives; firm size, offer size, stock return, stock turnover, foreign share ownership, institutional share ownership and age to see the effect of long run return. The study covered a period stretching from 1993 to 2013. It was prompted by the fact that studies done in developed economies regarding the performance of share issues in the long run give conflicting results. Some firms give negative returns whereas others give positive returns regardless of whether these are SEOs, IPOs or SIP. Seven hypotheses were developed to test these specific objectives in level of significance at 5%. The research philosophy was based on pragmatism. Pragmatism arises out of action, situations and consequences as opposed to post positivism that is based on antecedent conditions. The study adopted cross-sectional time series research design strategy with descripto-explanatory purposes. All the Thirty-two (32) firms that issued equity at the NSE over the period of study were included as a sample. Secondary data was used for the study. These were collected from NSE database and CMA database. The study used Stata statistical package to analyze the data. Model specification tests were carried out to ensure that models were neither over nor under specified. Each firm was subjected to analysis for five years. Hausman test was used to confirm validity of panel regression model applicable; OLS, fixed or random effects. Diagnostic tests carried out included; normality, autocorrelation, multi-co-linearity, homoscedasticity, stationarity, co-integration and granger causality. Cumulative average return was regressed against the explanatory variables to determine the direction and strength of the independent variables as indicated by R2. By use of descriptive statistics many variables were normally distributed. PCCs showed that many clusters were positive but with moderate strength. The study was based on individual variables and at 5% level of significance. This gave the following results; firm size has no effect on long run return, offer size is found significant at 5% on cluster 1998-2002 only. Stock return was found statistically significant at 5% for cluster 2009-2013, Stock turnover has no significant influence on long run capital market return at 5% level of significance for all clusters, foreign share ownership is found to be statistically significant at 5% for only cluster 2009-2013, institutional shareholders is found to have insignificant influence on long run capital market return for all clusters on long run capital market return. Age as a moderating variable was not found to have a significance at 5% level on any of the ten clusters. The study concludes that three independent variables; offer size, stock return and foreign were statistically significant for certain clusters in certain periods therefore they have effect on long run capital market return.