Effect of Demonetization on Securities Market Performance in Kenya

Abstract

Purpose - The objective of this study was to examine the effect of demonetization on securities market performance in Kenya.

Methodology - The study employed an event study methodology which evaluated the performance of NSE 20 share index prices. The sample consisted of twenty firms listed and included under the NSE 20 share index and whose stocks traded in the entire period under consideration for this particular study.

Findings – On the 31st of May 2019, the Kenyan government effected a major economic change by demonetizing the old Ksh 1000 shilling bank note. The government issued a 122-day notice ahead of full withdrawal of its old 1000 shilling bank notes out of circulation by October 1, 2019. During this period, the old currency note was gradually removed from circulation and replaced with the new currency note. The main objective of demonetizing was to fight corruption and black money concerns in the country. Results from the study were based on the comparison between performance of the NSE 20 share index prices during the pre-demonetization and post demonetization period. The comparison revealed that demonetization had a statistically significant effect on securities market performance in Kenya.

Implications:

The demonetization announcement had significant effect on the securities market performance in Kenya. Securities prices did not confiscate the new information that came to the public through demonetization of Ksh.1000 announcement thus giving investors an opportunity to reap abnormal returns from trading of securities. The findings showed that securities reacted to the demonetization announcement as both AR and CAR slightly increased after the announcement date and then fluctuated thereafter possibly because demand for financial securities increased in the period with limited supply.

Value: This study has presented a new dimension that may explain the forms of efficiency at the Nairobi securities exchange. The objective of the Central Bank of Kenya was to maintain a stable economy while at the same time mopping out illicit cash from the population. The gradual approach used was practical as it reduced any collateral damages to the real economy and it ensured that there was sufficient time to reach out to its people with relevant information on demonetization. 

Key words: Demonetization, Share index, Securities Market Performance