THE MEDIATING EFFECT OF TRADING ACTIVITY ON THE RELATIONSHIP BETWEEN MARKET INFORMATION RISK 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. The objective of the
study was to determine the mediating role of trading activity (TA) on the relationship
between market information risk (MIR) and price discovery (PD) for stocks listed at the
Nairobi Securities Exchange and it was anchored on market microstructure theory. This
study followed the positivist paradigm and was guided by correlational descriptive
research design. The population for this study was all sixty six companies listed at the
NSE with the unit of analysis being stocks trading at the stock market for the period of
six months using 60 minute frequency intraday day data. Using the quantitative data,
the hypothesis was tested using correlation and Hierarchical multiple regression
analysis. The findings from Sobel tests found that the relation between the independent
variable, MIR and the dependent variable, PD, was affected by the introduction of
trading volume indicator of TA as a mediating variable. However, number of
transactions did not mediate the relationship between MIR and PD. Trading activity
based on the trading volume to number of transactions ratio composite was found to
significantly mediate relationship. Market microstructure frictions play a central role in
shaping the platform for risk sharing and price evolution. It is recommended that
regulators should therefore aim at continuously designing stock markets that will
facilitate efficient evolution of short-term equilibrium prices.
Key words: Market Microstructure, Trading Activity, Market Information Risk, Price
Discovery, Stocks Listed at NSE