EFFECT OF HERDING BEHAVIOR ON PERFORMANCE OF NAIROBI SECURITIES EXCHANGE

Patrick M. Ngumi,[1] Khatibu Kazungu[2] and Felician Mutasa[3]

CITATION: Ngumi, M,. P., Kazungu, K., Mutasa, F. (2016). Effect of Herding Behaviour on Performance of Nairobi Securities Exchange. International journal of Economics and Finance. Vol. 5 (8) PP 1-20.

ABSTRACT

This study examines whether corporate actions contribute to herding phenomena and whether herding behaviour in Nairobi Securities Exchange (NSE) follows political cycles. Further, the study explored the impact of both corporate actions and political cycles on performance of NSE. The study used monthly data from 57 different firms listed in the Nairobi Securities Exchange (NSE) from January 2007 to December 2013. The study adopted both Random Effects Model (REM) and Fixed Effects Model (FEM) which controls for heterogeneity which is prevalent among the firms under consideration to estimate herding effect and performance of firms listed at NSE. The study considered six corporate announcements in modelling and 25 key political events over the entire time period. From the empirical results, bonus corporate announcement was found to significantly cause herding but insignificant in determining performance of firms at NSE. Also, first and final corporate announcement was shown to significantly affect performance of listed firms at NSE despite failing to demonstrate significant relation with herding. On the other hand, political cycles did not portray significant relationship with herding but a positive and significant relationship manifested with performance of firms at NSE. The herding behaviour was associated with individual investors whereas firm performance was attributed to both political cycles, institutional and individual investors actions. Therefore, to have proper market stability which is appealing to retail and corporate investors, the findings recommend for a need by policymakers and relevant stakeholders to cogitate on these stock market parameters. These parameters are considered as the leading pointers of economic activities. Therefore the government need to give both private and public information on stock market performance. Finally there is a need to create conducive business environment to regain investor confidence which includes adopting price stabilization mechanisms to contain price changes. This is because herding behaviour may spur unnecessary volatility which is likely to destabilise the market and increase the fragility of the financial system.

Key Words: Herding Behaviour, Corporate action, Political Cycles, Random Effects Model and Fixed Effects Model