INFLUENCE OF STOCK MARKET LIQUIDITY ON PERFORMANCE OF FIRMS LISTED IN NAIROBI SECURITIES EXCHANGE IN KENYA

Abstract

The stock market in Kenya plays a vital role intermediation between borrowers and lenders hence uncertainty in the market impacts negatively to the economy. Unfortunately, the stock market has not been performing well. Despite posting a profit before tax of Ksh 233.1 Million in 2016, it was still a 39% decrease from Ksh. 381.5 Million in 2015. The study sought to investigate the influence of stock market liquidity on performance of firms listed on Nairobi securities exchange. It was guided by liquidity preference theory, trading cost theory and trading volume theory. A survey research design was applied and the study targeted 65 listed companies with sample size of 20 firms for a period ranging from 2014-2018. Secondary data was collected using a data collection sheet. Descriptive and inferential data analysis was done with the aid of Statistical Package for Social Sciences (SPSS version 24.0). Findings indicated that individually, market depth, market breadth, market resilience and market immediacy had a direct and significant effect on stock performance. Further, a combination of the stock market liquidity components yielded a positive and significant effect on stock performance. The study concluded that market breadth best explains stock performance, followed by market resilience, market depth and lastly market immediacy. This study is significant because it will enable the government to efficiently regulate the security exchange as it attempts to safeguard the investments of all the investors and help management of various firms on how best they can use the security exchange to raise finance.