External Cash Inflows and Stock Returns of Firms Listed at The Nairobi Securities Exchange, Kenya

Abstract

Stock prices at Nairobi Securities Exchange (NSE) fell contentiously for the last five years and the external cash inflows, have been fluctuating concurrently. A decrease in stock returns has an extremely negative influence on consumers and the economy. It is therefore crucial to assess the relationship between external cash inflows and the performance of stock returns. The objective of this research was to examine the effect of foreign remittances on the stock returns of firms listed at the NSE, Kenya. The study was anchored on the free cash flow theory, prospect theory, and FDI theory with an explanatory research design. The study employed secondary time series data covering a period of 13 years (2008-2020) incorporating 64 companies quoted at NSE. A data extraction checklist was employed to collect secondary data from NSE, CBK, and KNBS annual reports. Stata software was deployed for descriptive and inferential analysis. The study also carried out diagnostic tests which comprised of unit root test, lag order section test, normality test, cointegration test, and Granger Causality Test. The findings revealed that foreign remittance and external debts have a significant positive effect on the stock returns of firms listed at NSE and that foreign grants and FDI have a significant negative effect on the stock returns of firms listed at NSE, Kenya. The study, therefore, recommends that the policymakers in the Kenyan government ought to develop monetary and fiscal policies to regulate foreign direct investment inflows.
Key Words: External Cash Inflows, External Debts, Foreign Direct Investment, Foreign Grants, Foreign Remittances, Gross Domestic Product, and Stock Returns