Name: CHOGII, RONALD

Topic: MARKET INFORMATION RISK, TRADING ACTIVITY, ORGANIZATIONAL CHARACTERISTICS AND PRICE DISCOVERY FOR STOCKS LISTED AT THE NAIROBI SECURITIES EXCHANGE

ABSTRACT

Besides being one of the yardsticks for assessing the quality of financial decisions by management in the maximisation of shareholders wealth, stock markets around the world provide unparalleled investment destination for investors. Consequently, the structure and design of a financial market for stocks must continuously attempt to discover efficient market clearing prices in order to attract investor who will then initiate and continuously participate in the activity of trading. Asset pricing for financial instruments trading in exchanges with unique trading mechanisms still remains a widely debated issue in the discipline of finance because of its implications for risk management, planning of consumption, portfolio decisions, and promotion of societal welfare given microstructure frictions. The general objective of this study was to determine the relationship among market information risk, trading activity, organisational characteristics and price discovery for stocks listed at the Nairobi Securities Exchange. The study was anchored on the information based market microstructure theory. This study followed the positivist paradigm and was guided by correlational descriptive research design. The population was all sixty six companies trading at the stock market for a period of six months using sixty minute intraday data. Using the quantitative data, hypotheses were tested using simple, stepwise and hierarchical regression analysis and sobel tests. The study found positive and a statistically significant relationship between market information risk and price discovery. The findings from Sobel tests found that the relationship between independent and dependent variable was affected by introduction of trading volume as a mediating variable. However, number of transactions did not mediate the relationship between market information risk and price discovery. Volume to transaction ratio, a composite variable, was found to influence the magnitude and direction of effect and as such, trading activity in general was found to be a mediator. Further, the coefficient of the interaction term for ownership concentration and stock return volatility was found to be significant thus confirming presence of moderation effect. The findings supported the hypothesis that ownership concentration and stock return volatility has a significant moderating influence. Based on the composite variable, ownership characteristics were found to moderate the relationship between market information risk and price discovery. The results also showed that when considered together, market information risk, trading activity and organizational characteristics independently showed significant variations in price discovery. Based on the results, the regulatory regime and other stakeholders should aim at developing appropriate policies in an attempt to design an efficient securities market to enable market participants ease of access to information, enhance information content of stock and improve the process of price evolution during trading. It is important to introduce and adopt appropriate trading rules and mechanisms that improve the intensity of trading activity and process with which efficient short-term equilibrium prices are arrived at. The findings are expected to guide managerial practitioners and participants in terms of appreciating the integration of the various price discovery factors in the face of a challenging economic environment, and management of firm core processes in order to support entrepreneur spirit in the country. The government on the other hand has an obligation to provide stability of the economic environment which provides organizational characteristics through interventions that support eases market accessibility. It is recommended that other market microstructure studies should be undertaken using other measures of price discovery like information share and variance ratio. The study could also be replicated to cover cross listed stock and other securities not considered in this study.