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

DECLARATION 2

ACKNOWLEDGEMENT 3

ABSTRACT 4

CHAPTER ONE 7

INTRODUCTION. 7

1.1 BACKGROUND OF THE STUDY 7

1.2 THE PROBLEM STATEMENT 9

1.3 OBJECTIVES OF THE STUDY 10

1.3.1 SPECIFIC OBJECTIVES OF THE STUDY 10

1.4 SIGNIFICANCE OF THE STUDY 10

1.5 LIMITATIONS OF THE STUDY 11

1.6 SCOPE OF THE STUDY 11

CONCEPTUAL FRAMEWORK 12

CHAPTER TWO 14

2.1 Development of the stock market 14

2.2 Importance of stock market 16

2.3 Empirical evidence on factors affecting the development of stock market 18

2.3.1 Legal factors 18

2.3.2 PUBLIC KNOWLEDGE OF STOCK MARKET OPERATION 19

2.3.3 TRANPARENCY OF TRANSANCTION 20

2.3.4 MARKET OPENNESS 20

2.4 SUMMARY OF LITERATURE REVIEW 21

CHAPTER THREE 22

3.0 INTRODUCTION 22

3.1 Model specification 22

3.2 RESEARCH DESIGN 22

3.3 TARGET POPULATION 23

3.4 DATA COLLECTION 23

3.5 MEASURMENT OF VARIABLES 23

3.6 DATA ANALYSIS 24

CHAPTER FOUR 26

4.1 INTRODUCTION 26

4.2 Statistics Statistic Variables 26

4.2.1 Stock Market Development 27

4.2.2 Market Capitalization Ratio 28

4.2.3 Foreign Direct Investment 28

4.2.4 INCOME LEVEL 29

4.2.5 Savings and Investments 30

4.2.6 Macroeconomic Stability 31

4.2.7  Stock Market Liquidity 32

4.3.1 Correlation Analysis: Pearson Correlation 33

4.3.2 Regression Analysis and Interpretation of the Findings 33

CHAPTER FIVE 38

5.1 INTRODUCTION 38

5.2 Conclusion and Recommendations 40

5.3 Limitations of the Study 42

5.4 Suggestions for Further Research 43