Market Information Risk, Trading Activity and Organizational Characteristics: Combined influence on Price Discovery for Stocks Listed at the Nairobi Securities Exchange

Abstract

Abstract

This study sought to determine the combined influence of Market Information Risk, Trading Activity and Organizational Characteristics on Price discovery for stocks listed at the Nairobi Securities Exchange. Besides being one of the yardsticks for assessing the quality of financial decisions by management in the maximization of shareholders wealth, stock markets around the world provide unparalleled investment destinations for investors. Consequently, the structure and design of a financial market for stocks must continuously attempt to discover efficient market clearing prices. Price discovery for financial instruments trading in an exchange remains a widely debated issue in the discipline of finance because of its implications for risk management, portfolio construction, capital formation, preservation and allocation, and promotion of societal welfare. This study was guided by Market Microstructure Theory and specifically information-based models and descriptive research design. The study population was based on all sixty companies whose stocks trade at the Nairobi Securities Exchange for a period of six months using 60-minute intraday data during the continuous trading period. The hypothesis that was tested stated that there is no significant joint effect relationship of market information risk, trading activity and organizational characteristics on price discovery using a stepwise regression analysis. In establishing joint effect Bid-ask spread, trading volume, number of transactions, stock return volatility and ownership concentration were investigated individually and jointly. The results showed significant independent effects of market information risk, trading activity, organizational characteristics on price discovery and further it was established that the joint effect had a higher significance as compared to individual effects thus supporting the hypothesis. Based on the results of this study, the government, through Capital Markets Authority and other stakeholders, should develop appropriate policies in an attempt to design the securities market to enable market participants ease of access to information, enhance information content of stock, liquidity and improve the process of price formation.

Keywords:       Market Microstructure, Trading Activity, Market Information Risk, Price Discovery, Stocks Listed at NSE, Intraday Regularities.