THE EFFECT OF INVESTORS’ CONFIDENCE ON STOCK MARKET REACTION IN

KENYA

BY

HAULE HARRIET BERNARD

095111

A Management Research Project submitted in partial fulfilment of the requirements of the

degree of Bachelor of Commerce

Strathmore University

2019
 DECLARATION
This research project is my original work and has not been presented before for a degree or any
other academic award at any other university for examination.

Signature…………………………………. Date…………………………….

HAULE HARRIET BERNARD

095111

This project has been submitted for examination with my approval as the university supervisor.

Signature…………………………………. Date……………………………..

MR. JOHN WAWERU

DEPARTMENT OF FINANCE

STRATHMORE UNIVERSITY BUSINESS SCHOOL

STRATHMORE UNIVERSITY

2
 ACKNOWLEDGEMENT
First and foremost, I express sincere gratitude to the Almighty God for granting me good health
and wisdom to undertake this task.

I am deeply grateful to my parents for their moral and financial support throughout my studies
and while carrying out this project. Special appreciation also goes out to my supervisor Mr. John
Waweru for his encouragement, constructive criticism and support that ensured this project is
carefully done and completed successfully. I also wish to acknowledge my friends in school for
their academic support and encouragement while conducting this research.

Lastly but not least, I would like to thank Strathmore University for granting me the opportunity
to add to the field of knowledge by undertaking this task.

3
 DEDICATION
I humbly dedicate this work to the Almighty God for enabling me to accomplish this project
despite the difficulties I faced. I would also like to dedicate this project to my lovely parents and
siblings to whom I owe my inspirations to achieve.

4
 TABLE OF CONTENTS
DECLARATION..............................................................................................................................i

ACKNOWLEDGEMENT...............................................................................................................ii

DEDICATION...............................................................................................................................iii

LIST OF FIGURES.......................................................................................................................vii

LIST OF TABLES.......................................................................................................................viii

LIST OF EQUATIONS..................................................................................................................ix

ACRONYMS...................................................................................................................................x

CHAPTER ONE..............................................................................................................................1

INTRODUCTION...........................................................................................................................1

1.1 Background Information........................................................................................................1

1.1.1 Investor Confidence........................................................................................................3

1.1.2 Stock Market Reaction....................................................................................................4

1.1.3 Investor Confidence and Stock Market Reaction............................................................5

1.2 Statement of the problem.......................................................................................................5

1.3 Research objectives................................................................................................................7

1.4 Research questions.................................................................................................................7

1.5 Significance of the study........................................................................................................7

1.5.1 Capital Markets Authority...............................................................................................7

1.5.2 Scholars, researchers and students..................................................................................7

1.5.3 Fund managers and Stockbrokers....................................................................................8

1.5.4 Investors..........................................................................................................................8

1.6 Scope of the study..................................................................................................................8

CHAPTER TWO.............................................................................................................................9

LITERATURE REVIEW................................................................................................................9

5
 2.1 Introduction............................................................................................................................9

2.2 Theoretical Framework..........................................................................................................9

2.2.1 Overconfidence Theory...................................................................................................9

2.2.2 Prospect Theory.............................................................................................................10

2.2.3 Efficient Market Hypothesis Theory.............................................................................11

2.3 Empirical Review.................................................................................................................12

2.3.1 Global Perspective.........................................................................................................12

2.3.2 Regional Studies............................................................................................................15

2.3.3 Local Studies.................................................................................................................17

2.4 Research gap........................................................................................................................18

2.5 Conceptual Framework........................................................................................................18

2.6 Chapter Summary................................................................................................................19

CHAPTER THREE.......................................................................................................................20

RESEARCH METHODOLOGY..................................................................................................20

3.1 Introduction..........................................................................................................................20

3.2 Research Design...................................................................................................................20

3.3 Population............................................................................................................................20

3.4 Sample Design.....................................................................................................................20

3.5 Data Collection....................................................................................................................21

3.6 Data analysis........................................................................................................................21

3.6.1 Descriptive Statistics.....................................................................................................21

3.6.2 Analytical model...........................................................................................................22

3.7 Significance test...................................................................................................................22

3.8 Measurement of Study Variables.........................................................................................23

3.8.1 Investor Confidence......................................................................................................23

6
 3.8.2 Stock market reaction....................................................................................................23

3.9 Validity testing.....................................................................................................................24

CHAPTER FOUR.........................................................................................................................25

RESULTS AND DISCUSSIONS..................................................................................................25

4.1 Introduction..........................................................................................................................25

4.2 General Information.............................................................................................................25

4.3 Descriptive Statistics............................................................................................................25

4.3.1 Analysis of Descriptive Statistics..................................................................................26

4.4 Inferential statistics..............................................................................................................27

4.4.1 Regression Analysis......................................................................................................27

4.4.2 Analysis of Variance.....................................................................................................28

4.4.3 Model Coefficients........................................................................................................28

4.4.4 Correlation Analysis......................................................................................................29

CHAPTER FIVE...........................................................................................................................31

SUMMARY, CONCLUSION AND RECOMMENDATIONS....................................................31

5.1 Introduction..............................................................................................................................31

5.2 Summary of findings............................................................................................................31

5.3 Conclusion...........................................................................................................................32

5.4 Recommendations................................................................................................................33

5.5 Limitations of the study.......................................................................................................34

5.6 Suggestions for further research..........................................................................................35

REFERENCES..............................................................................................................................36

APPENDICES...............................................................................................................................43

Appendix I: Companies listed at the NSE as at 31st December 2018.......................................43

7
Appendix II: Sample of 31 Companies that formed part of the NSE 20 Index within the period
2014-2018......................................................................................................................................46

8
 LIST OF FIGURES
Figure 1:The Conceptual Model.................................................................................................18

9
 LIST OF TABLES
Table 1: Descriptive Statistics.....................................................................................................26
Table 2: Model Summary...........................................................................................................27
Table 3: Analysis of Variance.....................................................................................................28
Table 4: Model Coefficients........................................................................................................29
Table 5: Correlations...................................................................................................................30

10
 LIST OF EQUATIONS
Equation 1.....................................................................................................................................22
Equation 2.....................................................................................................................................23
Equation 3.....................................................................................................................................24

11
 ACRONYMS
CMA- Capital Markets Authority

EMH- Efficient Market Hypothesis

NSE- Nairobi Securities Exchange

SPSS- Statistical Package for Social Sciences

VAR- Vector Autoregressive Model

12
 ABSTRACT

Stock market reactions have been observed at the Nairobi Securities Exchange as a result of
extreme price volatility, which explains the possibility of underlying market inefficiencies that
affect the shareholder values as the stock prices move away from their fundamental values. Such
market reactions occur as a result of investor irrational behavior that causes market
inefficiencies. The drive of this study was to examine the effect of investor confidence on stock
market reaction in Kenya. Specifically, the study examined the effect of investors’
overconfidence on stock market in Kenya and the effect of investors’ underconfidence on stock
market reaction in Kenya. The target population was 65 listed companies at the NSE, and a
sample of 31 listed companies was selected from the population and used in the analysis. The
research was conducted over five years from January 2014 to December 2018, using secondary
data on stock prices, trading volume and number of deals. The theoretical groundings of this
study was based on the behavioral finance and efficient market hypothesis theories. The study
utilized simple random sampling in selecting the sampled listed companies in the NSE. The
study adopted descriptive statistics, inferential statistics and correlation analysis as the units of
analysis for the collected data. The data collected was analyzed using Excel for descriptive
statistics and Statistical Package for Social Science (SPSS) version 20 for inferential statistics
and correlation analysis. Descriptive statistics were presented using mean, standard deviation,
minimum and maximum values, kurtosis and skewness. Inferential statistics employed a multiple
regression model at 5% significance level. The study findings established a negative and
insignificant relationship between investors’ overconfidence and stock market reaction. The
study findings also established a positive and insignificant relationship between investors’
underconfidence and stock market reaction (R=0.102, Sig=0.492). Therefore, the study showed
that the model chosen for the study was statistically insignificant in explaining the effect of
investors’ confidence on stock market reaction in Kenya. In light of these results, the study
suggested that similar studies should be undertaken covering a period of more than five years.
Other variables not considered in the study that have a significant impact on stock market
reaction in Kenya should be taken into account. The study also recommends the utilization of a
different model to analyze the relationship between the selected variables.

13
14
 CHAPTER ONE

INTRODUCTION

1.1 Background Information

Investors’ presumed reaction to unforeseen events or news is gaining profound recognition in the
process of understanding the complex behaviour of the stock market [ CITATION Soh17 \l 1033 ].
Good or bad news tend to cause an increase or decrease in stock prices even though the news
does not directly affect the performance of companies. Such price fluctuations indicate that there
are certain anomalies in the market, caused by investors' irrational behaviour. Henceforth, among
other possibilities, the stock markets may show overreaction and under reaction in the long term
or short-term depicting inconsistency in investor behaviour. Investors usually give significant
weight to recent information and under weigh prior data, causing stock market reactions
(DeBondt & Thaler, 1985). Therefore stock market reaction is caused by investor irrational
behaviour and in turn, leads to market inefficiencies.

A basic assumption in the classic model traditional finance theory is that investors in the stock
market behave rationally, making unbiased valid decisions all the time [ CITATION Bas17 \l 1033 ] .
However, several studies have shown that investors also exhibit behaviour that deviates from the
rationality assumed in the traditional Efficient Markets Hypothesis. [ CITATION Tve81 \l 1033 ]
Experimented on financial decision making under uncertainty and obtained evidenced showing
that investors are not rational as the traditional finance models claim. There is strong evidence
that investor behaviour leads to market anomalies and causes the ability to predict returns from
the stock market reactions. Investor behaviour explains market reactions to determine whether
profit opportunities exist based on the prediction of return pattern (Daniel, Hirshleifer &
Subrahmanyam, 1997).

Stock market reaction is the trend reversal in the movement of stock prices which are associated
with a downward movement in stock prices after a period of upward movement, as the volume of
shares traded decrease or as investors sell off their shares in fear of the stock being overvalued
DeBondt and Thaler (1985). While assessing investors behaviour in the stock market, two major
market reactions, Overreaction and Underreactions were largely reported in the literature.

1
Investors with their irrational behaviour, either overact or underreact to every new information or
event. While overreactions define extreme stock price reactions to past information,
underreaction explains the slow adjustments of prices to corporate announcements [ CITATION
Nou17 \l 1033 ].

Researchers have conducted research to clarify the event of overreaction and underreaction,
which were discovered to be in opposition to the Efficient Markets Hypothesis (EMH) of (Fama,
1970). These two phenomenon are one of the most significant challenges to market efficiency
and established a framework for the advancement of behavioral finance (Soares and Serra,
2005). Investors regularly over or underreact to news in the stock exchange, which results in
overstated stock prices (Zafar, 2017). EMH holds that a security's price will precisely reflect all
the accessible arrangement of information in the market and that nobody can effectively exploit
momentary revisions to even outrageous price movements. However in cases, such as
overreaction, the most fascinating inference is the investors’ capability to achieve extraordinary
profits by purchasing or selling stocks ahead of time of any upcoming corrections of information
in the market, and this is a probability that is in opposition to the EMH (Brown and Harlow,
1988).

Investors and other market members respond to extraordinary price movements depending
fundamentally on the course of introductory price changes. For positive news and occasions, it is
confirmed that investors set stock prices in something besides an effective way for both prompt
and long term reactions. On the other hand, for negative occasions or events , it is confirmed that
short term reactions are reliable with the three expectations of ovvereaction hypothesis which are
magnitude, direction and intensity effects (Brown and Harlow, 1988).

Shefrin and Statman (2011) showed that investors' decision making pursuit were established in
the pyschology of perceptions, feelings, culture and aspirations.Investors go overboard with the
organizations' performance by purchasing or selling stocks that have encountered late gains and
misfortunes respectively (Farag, 2014). The impact of overreaction prompted stock prices being
pushed past their inherent market value, just to have balanced rational investors taking the
opposite side of the exchanges and in the long run taking the stock prices back to their intrinsic
values.

2
DeBondt and Thaler (1985) research studies examined on cognitive psychology and
recommended that infringing upon Baye's standard most financial specialists will generally
overreact or attach too much importance to startling and emotional new and events. The
overreaction impact is unsymmetrical implying that the losers experience significant
overreaction and winners show low unusual market returns, consequently it is a lot bigger for
failures than victors.

People firmly underreact to uplifting news as opposed to terrible news (Weber and Welfens,
2007). Jegadeesh and Sheridan (1993) were the primary researchers to contemplate the example
of underreaction in returns. The scholars reported the speculator methodologies of purchasing
stocks that performed well previously (winner stocks) and selling stocks that performed less
(loser stocks) produced noteworthy positive returns more than 3 to a year holding period while
researching the years 1965-1989. Jegadeesh and Sheridan (1993) found that stocks with the most
returns comes back from the earlier year likewise to earn higher returns in the next six months,
and attributed this attitude to the momentum effect. This suggests stock prices underreact to
significant yields for about a year after they have been declared (Ball and Brown, 1968).

The Kenyan Stock market has evidenced cases of stock market reaction to aspects like earnings
and dividends announcements, price volatility, new taxation measures that mostly results to
abnormal market returns (Rono; 2013 Maringa; 2018, Cherono, Nasieku & Olweny; Sunday,
2018). Investor behavior variables such as overconfidence, herd behavior and loss aversion have
a significant impact on stock market reaction, indicating that investor behavior results in
abnormal returns of stocks listed on the NSE (Cherono, 2018).

1.1.1 Investor Confidence

Investor confidence has been a subject of enthusiasm in the field of behavioral finance for a long
time and is presently connected with increased risk appetite and stock exchange volume among
market members (Meier, 2018). In Kenyan organizations, the degree of voluntary disclosure is
an indispensable piece of the procedure in building investor confidence and trust, since
organizations may take part in voluntary disclosures to increase the value of their stocks hence
resulting to investor confidence (Barako, 2007).

Investor confidence is the readiness to participate in venture openings and related intermediation
channels accessible to them dependent on their view of risk and return. Investor confidence can

3
be partitioned into ‘Investor Optimism' which refers to investors' view of risk and expected
return intrinsic to securities issued by organizations and 'Investors Trust', which refers to
investors’ impression of the risks and losses from potential takeovers by other market members
(Ko, 2017). Investor confidence can also be defined as investor appetite for more securities in
their portfolio while investing in the securities market over a certain period [CITATION Ngw17 \l
1033 ]. Safeguarding investor confidence boosts investor participation in financial market
activities and encourages channeling of savings into productive investments, therefore promoting
efficiency and capital accumulation in investment for the development of the real sector
[ CITATION Bit10 \l 1033 ].

Stout (2002) explained that the possibility that many investors invest, is because they trust the
market, and this incorporates both personal trust in a broker and investment advisor and
institutional trust in the market or the legal system. However, when the share prices go down for
almost any reason the trust model of investor behaviour suggests that many investors may begin
to change their beliefs about the markets. A belief that markets are faced with stock losses
instead of gains, and therefore formerly trusting investors lose faith with the market.

1.1.2 Stock Market Reaction

A stock market is a market where entities and individuals buy and sell shares at prices that reflect
the market forces of demand and supply and low transaction costs [CITATION Cha08 \l 1033 ]. The
stock market is like an investment roller coaster which rides on four wheels; investor
psychology, market fundamentals, globalization and the macroeconomic variables[ CITATION
Chi13 \l 1033 ].

Stock market reaction is normally the reversal in the movement of a stock’s price. Regularly, it is
associated with a downward movement in the price of a stock after a period of upward
movement. Stock market reactions are most likely to be mild and lead to a slight increment or
decrease in stock prices instead of an enormous change in the stocks’ worth (DeBondt and
Thaler, 1985). Market reactions will frequently happen after information or news is declared in
the market, prompting changes in value instability and trading volume. This idea is upheld up by
two phenomena in the stock market; overreaction and underreaction which are significant
challenges to market efficiency and has assembled the establishment of behavioral finance.

4
The Overreaction phenomenon portrays the way investors respond excessively to new
information causing dramatic changes in security prices in such a way that prices will not
completely reflect the security's inherent value quickly following the event (Soares and Serra,
2005). In particular, market participants overreact when unexpected favorable or unfavorable
news induce trading behavior that results in increase or decline in prices relative to the actual
value implied by the nature of the event [ CITATION Bro88 \l 1033 ].

Underreaction is a circumstance whereby investors tend to predict the future and give significant
weight to salient past events as opposed to current news or events. Subsequently, news is
incorporated gradually into prices, which will generally show positive autocorrelations of returns
over moderately short horizons (Barberis, Shleifer, and Vishny, 1997). Different researchers, for
example, Kaestner (2006) characterize underreaction as a circumstance where investors fail to
react fully and immediately to new information in the market.

1.1.3 Investor Confidence and Stock Market Reaction

Investor confidence exerts influence on buying and selling decisions in the market and therefore
drives post-event price behavior and market returns (Sturm, 2003). Investors respond
distinctively to price changes in the stock market, in view of the certainty they have in the market
to foresee future returns. In the event that investors are confident about the market's strengths,
positive anomalous returns will pursue negative price shocks, on the other hand if investors are
sure about the market's shortcomings, at that point negative anomalous returns will follow
positive price stocks. Market frictions, noise and information in the stock market cause investor
confidence that in turn influences the behavior of security prices, leading to price movements
from the rational expectations value [ CITATION Kur08 \l 1033 ].

The more the sophisticated investors are willing to devote their portfolio to riskier investments,
the greater their confidence or risk appetite. When investors’ risk appetite increases, investors
also increase their holdings of risky investments. This process occurs when investors react to
good news and increased prices but could also happen when there are bad news and falling
prices[ CITATION Sta19 \l 1033 ]. Bitok, Tenai and Rono (2010) concluded that investor
psychology is a possible clarification for stock price movements, demonstrating that the reaction
of investors assumes a crucial role in affecting stock prices.

5
1.2 Statement of the problem
The Nairobi Securities Exchange has been excelling since the introduction of the automated
trading system at the NSE in 2006, that enabled the security market to keep up with other major
stock exchanges around the world. This can be evidenced by using the performance of the NSE
20 share index as an example. The NSE 20 index measures the movement in share prices of the
selected 20 best performing companies which are relatively stable. The index increased from
2,738 in 2004 to 4158 in 2006, before reducing to 2,462 in 2009 and reverted to better
performance in March 2015 at 5,494. This has been contributed by the increase in companies
issuing Initial Public Offering, which has given investors more opportunities to invest in
different stocks.

However, due to the many processes in the NSE, the stock prices have proved to be turbulent as
they keep on changing from time to time. The movement in stock prices and the trend of changes
are of great interest in the stock market given their immense effect on the stability of the stock
market performance and the returns generated from the investments [ CITATION May04 \l 1033 ].
Henceforth it is very vital for the Capital Market Authority and investors to understand the
causes of price movements in the NSE. Security investments are usually too hard and risky to
predict their future outcome or direction [ CITATION Ngu17 \l 1033 ]. According to the behavioral
theory of rational expectations, both individual and institutional investors’ prefer low risks-low
returns to high risk-high returns from their investments. Therefore, this study seeks to find out
how investor behavior particularly investor confidence influences the movement of stock prices.

The Kenyan stock market has evidenced cases of stock market reactions as a result of extreme
price volatility which reasons out to the possibility of underlying market inefficiencies existing
in the market that affect shareholders’ wealth [CITATION Ire18 \l 1033 ]. Such market reactions are
as a result of irrational investor behavior leading to market inefficiencies that contradict the
theory of EMH Fama (1970) whereby security prices do not accurately reflect all the available
information or their intrinsic values.

While there have been studies carried out on factors influencing investors’ decision making in
the Stock Market, there has been limited data and research on how investor confidence
influences stock price movements as a reaction of the market. It is not only the market
fundamentals, that influence investment decisions or movement in stock prices but rather human

6
mental conditions, perceptions, sentiments, aspirations and the like also have their impact
[ CITATION Nou17 \l 1033 ] . Many scholars have also carried out Researches related to Stock
Market reaction while investigating different behavioral biases such as overconfidence,herding
behaviour, mental accounting and loss aversion. But this study chooses to concentrate on the
effect aggregate investor confidence among other behavioral variables on stock market reaction.
Therefore these gaps trigger the current study on the effect of Investor overconfidence and
underconfidence on stock market reactions in Kenya.

1.3 Research objectives

The general objective of the study is to examine the effect of investor confidence on stock
market reaction in Kenya. The specific objectives are;

i. To examine the effect of investor overconfidence on stock market reaction in Kenya.

ii. To examine the effect of investor underconfidence on stock market reaction in Kenya.

1.4 Research questions

i. What is the effect of investor overconfidence on stock market reaction in Kenya?
ii. What is the effect of investor underconfidence on stock market reaction in Kenya?

1.5 Significance of the study

1.5.1 Capital Markets Authority
The research information will act as a guide to the Capital Markets Authority on the effect of
investor confidence on stock market reaction. The study will provide information to
policymakers in their effort to ensure economic stability through formulating policies that
enhance effective asset allocation in the capital markets.

Moreover, the study will be useful to the CMA in monitoring and regulating the market activities
by ensuring that the listed companies provide sufficient information, which will help reduce
investor irrational behaviors. For companies that are going to go public in future, these findings

7
can enable them to understand how investor confidence can greatly influence the movement in
security prices and therefore set realistic or reasonable prices that will attract the investors to
trade more.

1.5.2 Scholars, researchers and students

The study findings will provide vital data to future scholars, researchers and students who may
be interested to conduct research on the same field. The study will be useful to researchers and
scholars in identifying other areas of research on the related topic, by highlighting the topics that
require further research and reviewing the literature to establish the research gaps. The research
will also add to the existing field of knowledge in behavioural finance.

1.5.3 Fund managers and Stockbrokers

This study is likely to help fund managers and stockbrokers to well understand investor
behaviour and deliver the right information to meet the needs of the investor while advising them
appropriately on sound investment decisions. The NSE can use these study findings as a basis of
investor information and minimization of anomalies in the Kenyan market brought about by
investor rationality in investment decisions.

1.5.4 Investors
This study will be beneficial to concerned investors especially individual investors, who want to
be more aware of how their behaviour can affect the movement of stock prices, and in the
process extract more information, which would help them change their perceptions or attitudes
towards the stock market. This study will also be useful to investors in guiding them to observe
behavioural factors while making investment decisions.

1.6 Scope of the study

This study determines the effect of investor confidence on stock market reaction in Kenya. The
study is only limited to firms that were listed at the NSE from the period 2014- 2018. The period
2014-2018 was considered to be sufficient enough, to cover stock market reaction during periods
of movement in stock prices from their intrinsic value, market stress and extreme price volatility
experienced at the NSE.

8
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction
The chapter gives a critical review of the pertinent literature on the effect of investor confidence
on stock market reactions in Kenya. It covers the theoretical framework, empirical literature,
research gap, conceptual framework and then concludes with a chapter summary.

2.2 Theoretical Framework

This section includes the theoretical literature from different scholars regarding the effect of
investor confidence on stock market reaction. The theories that are relevant to this study are
Overconfidence Theory, Prospect Theory and Efficient Market Hypothesis Theory.

2.2.1 Overconfidence Theory

The concept of overconfidence is a classic in the field of behavioral finance. Kahneman and
Tversky (1979), proposed the overconfidence theory as an oddity of human judgment that was
demonstrated in several experiments by cognitive psychologists. The theory explains that
investors are highly overconfident when it comes to valuing their stocks or investments, meaning
that they depend on their estimations, judgement and information more than publicly available
information. This is the main reason why investors usually ignore any chance of error in their
judgement. (Daniel, David, and Avanidhar, 1997) proposed a hypothesis dependent on investor
overconfidence and self-attribution to depict several patterns of securities’ returns that appeared
to be anomalous from the point of view of efficient markets hypothesis (Fama, 1970).

Daniel et al. (1998) proposed a theory of security markets underreaction and overreaction
dependent on two psychological biases which are; Investor overconfidence on the precision of
private information and self-attribution, which caused uneven moves in investor confidence as a
component of their venture outcomes. DeBondt and Richard (1995) expressed that maybe the
most robust finding in the psychology of judgement is that individuals are overconfident. Daniel
et al. (1998) characterized an overconfident investor as one who overestimates the accuracy of
private information where he has greater individual inclusion, but not of public information

9
signals. As the public information touch base in the market, the inefficient deviation of the stock
prices is partially corrected, overall and on resulting dates, as additional public information
arrives in the market, the average prices draw closer to the complete information value. The
significant thing to note here is that investors and stock prices will in general overreact to private
information signals and underreact to open information signals.

Marchand (2012) explained that overconfident investors tend to over-estimate their capabilities
and perceive themselves as skillful. The excessive trading phenomenon in the stock market is
often caused by investor’s overconfidence. Odean (1998) developed a theoretical model, which
linked high trading volume directly to investor overconfidence. Overconfidence increases the
trading volume and market depth and on the other hand, decreases the expected utility of
overconfident traders. Overconfident investors can cause markets to underreact to the
information of rational traders, considering whether overconfidence of market participants
overestimated their ability to interpret information.

Grinblatt and Kelorhaju (2000), Statman, Thorley and Vorkink (2006) researched on the direct
link between investor overconfidence and trading behavior and had comparable findings that,
overconfident investors in most cases tend to trade excessively, which in the long run influences
the performance of their portfolio and the overconfidence behavior is especially seen in male
traders (Barber and Odean, 2001). Griffin, Nardari and Stulz (2007) gave out proof from
numerous stock markets that in total, incremental trading activity is attributed to high past
market returns.

2.2.2 Prospect Theory

This theory was formulated in 1979 and further developed in 1992 by Amos Tversky and Daniel
Kahneman. The theory states that, individuals settle on choices dependent on the potential
estimation of additions and misfortunes as opposed to the outcome and therefore choices will be
founded on apparent gains instead of apparent losses.

Kahneman and Tversky (1979) formulated the prospect hypothesis to show the utility and risk
predispositions of investors. The authors tested how investors would exaggerate recent
information by neglecting past information, in view of their judgment appraisals of probabilities.
This would in the long run lead to exaggerated optimism over uplifting news and outrageous

10
negativity over terrible news. The stock prices would move briefly from their intrinsic values,
beginning in the medium-long term, a mean-returning impact.

Kahneman and Tversky (1979) state that because of constrained psychological limit, investors
cannot examine information ideally or optimally. Frequently, human comprehension brings
about irrational components notwithstanding when attempting to make rational decisions.
Barberis and Thaler (2003) indicated proof that apparent misfortunes cause a more passionate
effect on a person than completes an equal measure of increases. Henceforth when given the two
decisions offering a similar outcome, an individual investor will pick the choice offering
potential gains, a reason as to why this theory is otherwise called loss aversion.

Thaler, Tversky, Kahneman and Schwartz (1997), state that loss aversion has two ramifications.
Firstly, investors will acknowledge risks simpler if they do not assess their investments much
frequently. Furthermore, investors will accept more risks when losses from their investments are
eliminated. Loss aversion might be a typical element of investor behavior that for the most part
influences decision making process and investor wealth (Odean, 1998).

2.2.3 Efficient Market Hypothesis Theory

The efficient market hypothesis (EMH) developed by Fama (1965) forms the foundation of
modern finance and has been the dominant investing theory for more than 40 years now. A
market is said to be efficient concerning the available information set if the price fully reflects
that information. In an efficient market all relevant information to the value of a security,
whether available to existing or potential investors, should be quickly and accurately reflected in
the market price (Fama, 1970). This is on the grounds that when new information arrives in the
market, the news spread all around rapidly and is consolidated quickly into security prices.

The primary objective of the EMH is that the stock prices precisely and rapidly mirror all the
available information so that nobody can acquire unusual returns. Fama (1970) clarifies that the
prices respond only to the available information to the market, and since all market members rely
upon the same information, no investor will figure out how to make abnormal profits. Malkiel
(2003) has noticed that there exists a contrast between market efficiency and perfect price
estimations. The market can have predictable stock market returns and regularly misprices
securities, in any event at least in the short run, however an investor cannot know beforehand
when mispricing will happen. In a circumstance where individuals in the securities exchange act

11
reasonably and have similar information, the stock costs will consistently reflect all accessible
information about a company’s intrinsic value (Fama, 1970).

The EMH is not only concerned with the source and type of information, but also the speed and
quality of which the information is disseminated among investors. According to Fama (1970),
the three forms of market efficiency helps in questioning the type of information incorporated
into the stock prices, which are the strong form, the semi-strong form and the weak form of
efficiency market. The weak form reflects the situation where prevailing security prices reflect
all the information contained in the past prices, trading volume, stock returns and information
from the market [ CITATION Ila13 \l 1033 ] . In this way, the past information cannot be utilized to
anticipate future value changes. The semi-strong expresses that, the present stock prices do not
just mirror all past price movements but also all the current public information. The public
information is such as earnings and dividends announcements and a company's financial
statements. The strong form argues that current security prices include both public and private
information. The present security price reflects the intrinsic value of the share and thus there is
no opportunity for all the market participants to have access to critical information relevant to
security prices (Fama, 1970).

2.3 Empirical Review

There are several empirical studies done globally, regionally and locally to explain how investor
confidence influences stock price movements.

2.3.1 Global Perspective

Bowman and David (1998) objective were to examine the short-run overreaction in the New
Zealand Stock Market. The overreaction speculation attested that stock prices will tend to
overreact to unexpected and dramatic news. The behavior of stock prices in New Zealand was
inspected after a large change in weekly prices. The discoveries of the examination proposed that
the stock market overreacts, particularly in the instances of decrease in stock prices.
Additionally, it was evidenced that reversal movements increased in magnitude as the changes in
initial prices increased.

Moskowitz and Grinblatt (1999) led research to give an explanation whether industries explained
momentum. They saw that stock market reactions; underreaction and overreaction have regularly
been related with the past trading volume pattern. The researchers uncovered that return

12
continuation and reversals are profoundly distinct for a firm. In addition, they accentuated that
the size of the firm contains significant information about probable future returns.

Daniel and Titman (2000) researched on market effectiveness in an irrational world especially on
whether investor overconfidence influenced stock prices. The study utilized quantitative research
design and panel data model regression analysis to observe the relationship between stock
returns and both Book to Market worth and Momentum. Their analysis suggested that investor
overconfidence potentially generated momentum in stock market returns and that the momentum
effect was expected to be the strongest stocks whose valuations required the interpretation of
uncertain information.

Mardyła (2012) researched on the strength and weight of information and investor confidence in
stock markets. The author showed that in the event where investors’ confidence is influenced by
information strength and weight, then the stock prices will display delayed overreaction, an event
that may continue for a long period of time. Moreover, as additional information is presented,
irrational investors become more doubtful and the stock prices are likely to underreact to
imprecise information.

Henker and Henker (2010) investigated whether retail investors were the culprits in causing
stock price anomalies in the Australian Stock Market. The stock market at that time was
characterized by a high degree of direct portfolio holdings by individual investors, whereby it
was speculated that there was influence from the retail investors who are prone to be irrational.
The authors focused primarily small on capitalization stocks while studying the stock price
anomalies. The study found that retail investors are not accountable for stock mispricing since
their trading is unlikely to affect stock market prices.

Tariq and Ullah (2013) objective were to investigate investor overconfidence in the Pakistan
Stock Market. The study data was taken from a population that comprised of 26 securities
representing all sectors of the Karachi Stock Exchange from 2003-2010. The independent
variable was the weighted return of cross-section of stocks at a time and the dependent variable
was market turnover. The study adopted the quantitative research design and Vector
Autoregressive model (VAR) model for analysis. The study findings were that security returns
had a significant impact on securities’ trading volume, furthermore, volatility had an impact on
the stock returns but failed to impact trading volume. The VAR analysis also confirmed that

13
stock return for the previous days had a positive impact on todays’ turnover.

Kengatharan and Kengatharan (2014) studied on behavioral factors influencing investment

decision making and performance at the Colombo Stock Exchange. Data collected was analyzed
by using the Statistical Package for Social Sciences (SPSS). The study findings revealed that
Heuristics, Prospect, Herd behavior, and Market factors all affect the investment decisions of
individual investors at the Colombo Stock Exchange. Heuristics factor consists of two behavioral
variables; anchoring and overconfidence. The prospect factor includes only two variables, which
are, regret aversion and loss aversion. The market factor also includes two variables; customer
preferences and market information.

Pakistani investors suffer from either of the behavioral biases which are; self-attribution, over-
optimism and overconfidence behavioral biases while making investment decisions. The
behavioral bias negatively correlates with investors' decisions in the Islamabad Stock Market
[ CITATION Ati14 \l 1033 ].

Bakar and Yi (2016) studied the impact of psychological factors on investors’ decision making in
the Malaysian Stock Market. The study collected data using questionnaires from a study sample
that included 200 respondents who comprised of people of different professions involved with
the Malaysian Stock Exchange. SPSS was used to run all the analysis and the results show that
availability bias, conservatism and overconfidence have significant impacts on the investors'
decision making while herding behavior had no significant impact on the individual investors'
decision making. The findings also revealed that the behavioral biases have a dependency on an
individual’s gender.

Ullah, Ullah and Rehman (2017) objective were to examine the effect of overconfidence and
optimism bias on decisions investors make in the Islamabad Stock Exchange. The study used the
SPSS package to analyze the data collected. The result findings showed that there is a significant
relationship between overconfidence and investment decision and also between optimism and
investment decision. Ullah, Ullah and Rehman (2017) further posited that overconfident
investors devote most of their time and money in collecting a wide range of information and
become more overconfident due to information and experience.

Sohail, Rehman and Javid (2017) investigated the stock market reactions on returns and trading

14
volume as a result of the global financial crisis. The objective of the study was to analyze
investor overreaction to understand the effect of the global financial crisis of 2008 on the
Pakistani stock market. Secondary data on trading volume, stock prices and KSE 100 index were
retrieved from the Karachi Stock Exchange websites for the period September 2007 to 2009. The
results of the study showed that low volume stocks tend to overreact remarkably during the post-
financial crisis period, and this was evidenced by the notable return reversals especially in the
third and fourth weeks following the 2018 financial crisis. Furthermore, the stock returns are
positive for the loser portfolios and negative for the winner portfolios in all the trading volume
categories specifying the occurrence return reversals.

2.3.2 Regional Studies

Muller (1999) studied investor overreaction on the Johannesburg Stock Exchange. The results
showed that there is evidence supporting investor overreaction, as panicking investors oversold
shares that had fallen far below their fundamental value. It suggested that stock market
overreacted and that investors paid too much attention to recent dramatic news. If overreaction
did occur and prices shot up, then there was a frequent subsequent revision of stock prices in the
opposite direction in the South Africa market.

Osei (2002) studied on asset pricing and information efficiency in the Ghana Stock Market. The
study hypothesized that the stock market is not efficient with respect to annual earnings
announcements on stock prices in the market. The findings of the study revealed that 3 out of the
16 firms under investigation have market risk greater than the market beta and the market rises
when there is good news and drifts down in case of bad news.

Frank (2004) examined on the rationality of the moderated confidence of investors based on
whether error is included as investors learn about the reliability of their information. The
assumption was that if error arises due to dependence on irrelevant signals to assess the
reliability of the information, then the moderate overconfidence they have is not rational. The
model developed in the study proposes that the market prices will underreact more as the
reliability of information increases.

Babajide and Adetiloye (2012) studied on investors’ behavioural biases in the Nigerian Stock
Market, where they discovered strong shreds of evidence on overconfidence, framing, loss
aversion and the status quo bias that existed among the Nigerian investors. It was also

15
established that investors' behavioral biases have a negative effect on stock market returns in
Nigeria, since the higher the level of behavioural biases shown by the investors, the lower the
stock market returns. The study uncovered that investors are not generally as rational as they
were depicted to be. All things considered, rational choices will be made, when there is
accessibility of adequate information to decision makers and when that information is displayed
and analyzed to acknowledge common risks.

Chidi, Agu and Ande (2013) examined to what degree did changes in stock prices impact
investors’ confidence in the Nigerian Stock Exchange. Investor Confidence in the Nigerian Stock
Exchange was greatly influenced by fellow investors’ point of view. This point of view all alone
did not depend on a determined calculated investigation of the market but rather investors’ good
faith and fears about the market. The matter of gaining or losing confidence in the stock market
was affected by the fundamental movement of the firms as opposed to the general
macroeconomic condition and that in the Nigerian stock exchange investor confidence is
basically determined by the opinion of fellow investors.

Abel and Mariem (2013) researched on the effect of investor overconfidence bias on the
decisions made by investors, pertaining to the relationship between overconfidence, volatility
and trading volume. This study indicated the importance of overconfidence bias in the analysis
of the Tunisian stock market characteristics. The sample of the study included 27 companies
listed at the Tunis Stock Exchange and the period under observation was over the period 2002-
2010. Boussaidi (2013), objective was to study on the relationship between overconfidence bias
and overreaction to private information, whereas the researcher tested, in the absence of public
information signals, the causality between trading volume and return volatility. The outcomes
showed that 33% of the firms investigated affirmed to the overconfidence/overreaction theory.

Metwally and Omneya (2015) objective was to study the effect of overconfidence as a behavioral
bias originated from the subsequent building block of behavioral finance on cognitive
psychological and influenced traders' convictions and conduct in the form of excessive
exchanges in the Egyptian Stock Market. Market states were found to present a critical effect on
trading activity inside the Egyptian Stock Market, even more explicitly in an upward inclining
market. Trading activity in the Egyptian Stock Market was set off by investors’ overconfidence
when the market was upward trending. It was seen that the market participants in the securities

16
exchange are demonstrated to exhibit overconfidence, since the past market returns influenced
the general past market turnover. The study findings likewise demonstrated that there was a
positive significant effect of market gains on market turnover in the following periods.

2.3.3 Local Studies

Werah (2006) studied on the influence of behavioral biases on investor activities at the NSE. The
population studied comprised of both individual and institutional investors at the NSE. The
results of the research suggested that the behavior of investors at the NSE was to some extent
irrational regarding the fundamental estimations because of anomalies such as herd behavior,
regret aversion, overconfidence and anchoring. Overconfident investors are willing to sell
winners but not losers, as it was witnessed in the Mumias Sugar Company share investments at
NSE. Kenya’s investors bought the Mumias Sugar Company stock at its peak and held it
expecting an increase in stock returns in the future. Investment decisions of institutional
investors were affected by loss aversion. Overreaction and underreaction of share prices had
been seen in the Mumias Sugar Company shares, an occasion that presented a very bitter lesson
and delineated how mismanagement could destroy shareholders wealth of Mumias Sugar
Company.

Waweru, Munyoki and Uliana (2008) objective were to determine how behavioral factors,
particularly in institutional investors affected investment decision making. Behavioral factors, for
example, mental accounting, overconfidence and loss aversion affected the decision of investors
investing at the NSE. Additionally, institutional investors referred to the trading activity pattern
of other investors in the process of making investment decisions.

Aduda and Muimi (2011) tested for investor rationality for organizations listed at the Nairobi
Stock Exchange and the outcomes were predictable with the notion of overreaction,
demonstrating that investors are irrational and respond disproportionately to both great and
terrible news. Longitudinal survey design was used as a part of the study and the focus was on
the financial performance of different companies at the NSE as well as movements in their share
prices, to establish whether there was any attestation concerning the overreaction hypothesis.

Makokha (2012) researched on the effect of overconfidence bias on stock returns of companies
listed at the NSE. The target population under investigation was 64 companies listed at the NSE.
Descriptive statistics and regression analysis were used in the study to analyze the relationship

17
between overconfidence bias and stock returns. The results indicated that investors’
overconfidence was negatively related to stock returns but the relationship between the variables
was not statistically significant. Furthermore, the study concluded that overconfidence,
profitability and firm size had positive impacts on stock returns.

Cherono, Nasieku and Olweny (2018) objectives were to study on the effect of Investor
overconfidence behaviour on stock market reactions in Kenya. The study adopted a quantitative
research design, and a sample study of 48 listed companies was used for analysis. The findings
were that overconfidence bias could lead to stock prices moving from their fundamental values
causing abnormal returns, hence stock market reaction resulting from differences in returns.

2.4 Research gap

Various studies have been conducted on the field of behavioural finance on how the behavioural
biases influence investor decision making activities in the stock market. The literature review
reveals evidence of significant research on investor overconfidence as a behavioural bias and the
effect it has on the stock market reaction but falls short in addressing the effect of
underconfidence on stock market reaction. Both international and local studies done are not
conclusive in their findings on investor underconfidence in the stock market. Therefore, to
capture the effect of aggregate investor confidence in the stock market, the study is going to
examine the effects of both investor overconfidence and underconfidence.

2.5 Conceptual Framework

Figure 1:The Conceptual Model

Independent Variable Dependent Variable

Investor Confidence
 Overconfidence Stock market reaction
 Underconfidence
Measured by abnormal market
Measured by the trading volume returns
and number of deals (Turnover
rate)

Source: Author (2019)

18
The conceptual framework gives a portrayal of how the study variables recognized are related to
each other. The variables in play here are investor confidence and stock market reaction. The
independent variable is investor confidence which is measured by the trading volume and
number of deals based on the research done by [ CITATION Bou131 \l 1033 ]. The stock market
development is the dependent variable, which is measured using abnormal returns based on the
research done by (DeBondt & Thaler, 1985).

2.6 Chapter Summary

This section of the study explored the various theories advanced for investor confidence and
stock market reactions including the overconfidence theory, prospect theory and efficient market
hypothesis theory. This chapter was relevant in analyzing past research activities by reviewing
empirical studies done by other researchers and scholars on the related topic from global,
regional and local perspectives. Moreover, the chapter also analyzed the relationships between
the independent and the dependent variables through the conceptual framework. After that, the
research gap was identified as the effect of investor underconfidence on stock market reaction in
Kenya.

19
 CHAPTER THREE

RESEARCH METHODOLOGY
3.1 Introduction
This chapter discusses the research methodology and tools that were used for the purpose of this
study. It mainly focused on the research design to be employed, the target population, sample
design, data collection criteria and finally the data analysis methods that were used to analyze
and solve the research problem.

3.2 Research Design

Descriptive and explanatory research design were used as part of this study. A descriptive
research design is used to obtain relevant information about the status of a phenomenon in an
accurate way (Bryman & Bella, 2011). This design also helps in drawing valid general
conclusions from the study findings. Descriptive research design was suitable for this study
because it will give a detailed analysis and measurement between the study variables using the
data collected.

An explanatory study uses theories to account for the forces that caused a particular phenomenon
to present itself and it goes beyond attempts and descriptions to explain the reasons for the
occurrence of a phenomenon [ CITATION Coo03 \l 1033 ]. The main goal of an explanatory research
design is to identify the traits and mechanisms of the relationship between the independent and
dependent variable.

3.3 Population
Mugenda and Mugenda (2003) define that a population is a whole group of individuals or objects
with similar attributes which the researcher wants to generalize. The target population in this
study comprised of all the 65 listed companies trading in equity stocks at the NSE as at 31 st
December 2018.

3.4 Sample Design

This study employed a simple random sampling technique. This technique involves the selection
of subjects so that all the members in a population have an even and independent chance of being
selected in the sample [CITATION Fra01 \l 1033 ]. It is the most desirable technique for almost

20
every survey, and it selects the most representative part of the entire population. A sample of 31
listed firms that formed part of the NSE 20 share index within the period 2008-2018 was
selected. The firms that form the NSE are considered to be the best performing selected based on
the weighted market performance, thus it is expected that the review of these companies will
generate the best results, as they better reflect the market performance. Market factors such as
inflation affect the share prices and these results to the movement of the share index, which may
be taken as a benchmark for expectations about the changes in the economy. The coverage of the
period 2014-2018 aimed at ensuring that comprehensive length of time is observed to deliver
accurate results as the period covers aggregate socio-political and economic changes in Kenya.

3.5 Data Collection

In this study, information from secondary data was the main data source. The secondary data was
collected exclusively from the NSE database. The study investigated the NSE historical data
specifically on share prices, trading volume and number of deals over the stated period. The
study used the Nairobi Securities Exchange as the data source in the pursuit to determine the
effects of investor confidence on stock market reaction. Data collected constituted of all the
monthly average figures of share prices, trading volume, and number of exchange of stocks or
outstanding shares for the period under study from the NSE. The data collected was then
analyzed and assisted in answering the research problem.

3.6 Data analysis

According to [ CITATION CRK04 \l 1033 ], it is important for data analysis to be conducted on the
data collected to transform it into a form that is suitable for use in drawing meaningful
conclusions. Data collected was sorted, classified and then tabulated for easy analysis. To
adequately capture the effect of investor confidence on stock market reaction the study
performed the analysis using descriptive statistics, multiple regression model and correlation
analysis to establish whether there is a relationship between investor confidence and stock
market reaction. The SPSS software version 20 and Excel were both used in the analysis.

3.6.1 Descriptive Statistics

Descriptive statistics is a summary statistic that deals with the collection, summarization and
presentation of numerical data. It is concerned with the development of some important
statistical measures that summarize research data [ CITATION CRK04 \l 1033 ]. The descriptive

21
analysis includes the measures of central tendency, measures of dispersion and measures of
symmetry that are used to understand the behaviour of the explanatory variables in the long run
and profiles the relationship between the investor confidence and stock market reaction. In this
study, the descriptive statistics gave a presentation of the mean, maximum and minimum values
including their standard deviations, kurtosis and skewness values.

3.6.2 Analytical model

This study used a multiple linear regression model to determine the extent to which the variation
in the stock market reaction as the dependent variable was influenced by investor confidence as
the dependent variable.

The following multiple linear regression model was used:

Equation 1

Y =α + β 1 X 1+ β2 X 2 + ε

Where;

Y = Stock market reaction which is the dependent variable.

α= y intercept of the regression equation

β 1 , β 2= slopes of the regression

X 1 = overconfidence

X 2 = underconfidence

ε = error term

3.7 Significance test

The test of significance was conducted to analyze the magnitude of the relationship between the
independent and dependent variables. The significance of these correlations was measured by t-
test at 5% of significance. The t-test measures the statistical significance of the parameter or
coefficient estimates. The F test was utilized to establish a statistical significance of the
regression model. The coefficient of determination (r 2 ¿ measured the proportion of the total
variation explained by the independent variable. The higher the (r 2 ¿ the more reliable the test is.

22
3.8 Measurement of Study Variables
The study adopted investor confidence as the independent variable and stock market reaction as
the dependent variable. This section gives details on how the study variables are operationalized
and measured.

3.8.1 Investor Confidence

Investor confidence was measured by using the trading volume values per year divided by the
number of deals per year to obtain the turnover rate. The turnover rate was used as a measure of
trading volume and number of deals [ CITATION Bou131 \l 1033 ]. According to [ CITATION Hof16 \l
1033 ], overconfident investors have a higher turnover rate than the underconfident investors.
Overconfident investors have 10.3% points higher monthly turnover than underconfident
investors.

Equation 2

nit
Turnover rate=
N it

Where:

nit = the volume of shares traded of stock i

Nit = the number of deals of stock i

i = 31 sampled listed company at the NSE

t = the 5 year- period

3.8.2 Stock market reaction

Stock market reaction was measured using abnormal returns. Abnormal return ( AR it ) is
computed as the difference between the actual stock return and the expected return to get the
market-adjusted return. MacKinlay (1997) stipulated that the assessment of the effect of events
in the stock market requires the measurement of abnormal returns. The following is the formula
for measuring abnormal returns:

Abnormal return = Actual return – Expected return

23
Equation 3

AR it=¿ R it−¿ E ( Rit ) ¿

¿

Where:

Rit = Actual return observed for all the 31 listed stocks in the 5-year period

E(R it )= Expected return observed for all the 31 listed stocks in the 5-year period

i = the 31 sampled listed companies at NSE

t = the 5-year period

3.9 Validity testing

Validity was used to test for the soundness of the data collection instrument. Validity shows the
level to which an instrument measures what it is expected to measure [ CITATION CRK04 \l 1033 ].
The study collected information on the selected variables from the NSE database. This showed
that the data was reliable and recent. The data was also relevant because the researcher obtained
only what was required for the study. To ensure validity, the data to be collected was discussed
with the project supervisor prior to data collection to make sure that the information generated
would help answer the research questions.

24
 CHAPTER FOUR

RESULTS AND DISCUSSIONS

4.1 Introduction
This chapter presents the data analysis results, interpretation and presentation of results. The
objective of this study was to determine the effect of investors’ confidence on stock market
reaction in Kenya. The chapter starts with data analyzed using descriptive statistics, regression
analysis and correlation analysis.

4.2 General Information

Data collected for the study was, historical monthly share prices and trading volume and number
of outstanding shares and NSE 20 Share Index values. The study sample was made up of 31
companies that formed part of the NSE 20 Index components for the period 2014-2018. The data
was gathered exclusively from a secondary source.

4.3 Descriptive Statistics

This section examines the descriptive statistics of all the independent and dependent variables
included in the analysis. Descriptive statistics is concerned with the development of some
statistical indices that are used to summarize and profile data under study such as measures of
dispersion, measures of central tendency and measures of symmetry (skewness) and peakedness
(kurtosis) [ CITATION CRK04 \l 1033 ]. Table 4.1 presents the summaries of the descriptive statistics
of all the study variables. Investor Confidence was the independent variable measured by the
turnover rate and the dependent variable was Stock Market Reaction which was measured by
abnormal returns.

25
Table 1: Descriptive Statistics

STOCK MARKET
STATISTICS REACTION OVERCONFIDENCE UNDERCONFIDENCE
Mean -0.026447 0.228701 0.077539
Standard Error 0.035248 0.089517 0.005174
Median -0.035607 0.000000 0.060000
Mode -0.421276 0.000000 0.000000
Standard Deviation 0.438838 1.114477 0.064411
Sample Variance 0.192579 1.242059 0.004149
Kurtosis 5.398075 26.746590 1.293433
Skewness 0.604962 5.210693 1.213981
Range 3.879411 7.211694 0.297700
Minimum -1.619764 0.000000 0.000000
Maximum 2.259648 7.211694 0.297700
Sum -4.099267 35.448622 12.018496
Count 155 155 155
Source: Author (2019)

4.3.1 Analysis of Descriptive Statistics

For stock market reaction, the mean was -0.026447. The maximum of the stock market reaction
level stood at 2.259648 and the minimum was -1.619764, while the standard deviation was
recorded at 0.438838. The kurtosis value was 5.398075, which is greater than the threshold value
of 3 indicating that the type of curve formed is leptokurtic. Skewness was recorded at 0.604962,
which is greater than 0 indicating that data set values are skewed to the right. The interpretation
was that the variable had a normal distribution. This indicated the stability of the variable and the
conclusion was that the stock market reaction variable had no significant deviation from the
expected mean.

For overconfidence, the mean was 0.228701. The maximum of overconfidence level stood at
7.211694 and the minimum was 0, while the standard deviation was recorded at 1.114477. The
kurtosis value was 26.746590, which is greater than the threshold value of 3 indicating that the
type of curve formed is leptokurtic. Skewness was recorded at 5.210693, which is greater than 0
indicating that data set values are skewed to the right. The interpretation was that the variable

26
data had a normal distribution. This indicated the stability of the variable and the conclusion was
that the overconfidence variable had no significant deviations from the expected mean.

For underconfidence, the mean was 0.077539. The maximum of underconfidence level stood at
0.297700 and the minimum was at 0, while the standard deviation was recorded at 0.06441. The
kurtosis value was 1.293433, which is less than the threshold of 3 indicating that the type of
curve formed is platykurtic. Skewness was recorded at 1.213981, which is greater than 0
indicating that data set values are skewed to the right. The interpretation was that the variable
had a normal distribution. This indicated the stability of the variable and the conclusion was that
the underconfidence variable had no significant deviations from the expected mean.

4.4 Inferential statistics

This section presents the regression analysis, analysis of variance and the model coefficients.

4.4.1 Regression Analysis

Stock market reaction measured by abnormal returns was regressed against two predictor
variables: Overconfidence and Underconfidence. The regression analysis was conducted at 5%
significance level. The study obtained the summary output statistics as shown in the table 4.2
below
Table 2: Model Summary

R Adjusted R Std. Error of

Model R Square Square the Estimate
a
1 .102 .010 -.003 43.94160%
a. Predictors:(Constant),Underconfidence,
Overconfidence
Source: Author (2019)

Multiple R, value of 0.102 indicates there is a weak relationship between the study variables. R
squared being the coefficient of the determination indicates the deviations in the dependent
variable that is as a result of variations in the independent variables. From the results in table 4.2
above, the value of R square was 0.010, meaning that only 1% of the deviations in stock market
return measured by abnormal returns at the Nairobi Securities exchange occurred because of the
variations in investor confidence levels. Other study variables not included in the study account
for 99% of the variations in abnormal returns.

27
The Adjusted R attempts to give a more honest value to the estimate of the R square for the
population when more predictors are added to the population. It gives a more realistic indication
of the predictive power of the R square. If the difference between the adjusted R and R square is
a huge value then the model assumes that some of the predictors that is the independent variables
are redundant and do not affect the dependent variables.

4.4.2 Analysis of Variance

For the purpose of showing the relevance of the regression model, the study conducted an
Analysis of Variance. The outcomes were as shown in the table 4.3 below.

Table 3: Analysis of Variance

Model Sum of Squares df Mean Square F Sig.

1 Regression 3080.146 2 1540.073 .798 .452b
Residual 293491.357 152 1930.864
Total 296571.502 154
a. Dependent Variable: Stock Market Reaction
b. Predictors: (Constant), Underconfidence, Overconfidence
Source: Author (2019)

The significance value is 0.452 is more than p= 0.05. This implies that the model was
statistically insignificant in predicting how investor confidence affects stock market reaction at
the Nairobi Securities Exchange. Moreover, the significance being more than p=0.05 indicates
that the null hypothesis should not be rejected, which stated that investor confidence does not
have a significant effect on stock market reaction in Kenya.

4.4.3 Model Coefficients

The results of the analysis obtained the model coefficients and corresponding statistics as
outlined in table 4.4 below.

Table 4: Model Coefficients

Unstandardized Standardized
Coefficients Coefficients
Std.
Model B Error Beta t Sig.
1 (Constant) -6.399 5.833 -1.097 .274
Overconfidence -.019 .033 -.047 -.570 .570

28
 Underconfidence .539 .568 .079 .950 .343
Source: Author (2019)

Given the beta values, there is a negative relationship between stock market reaction and
overconfidence and a positive relationship between underconfidence and stock market reaction.
The table on the model coefficients above indicates that none of the selected predictor variables
is a significant determiner of stock market reaction in Kenya as indicated by p values that
exceed 0.05. Therefore, the regression analysis results show that the effect of investor
confidence on stock market reaction cannot be expressed using the equation:
Y =α + β 1 X 1+ β2 X 2 + ε

Where;

Y = Stock market reaction which is the dependent variable.

α= y intercept of the regression equation

β 1 , β 2= slopes of the regression

X 1 = overconfidence

X 2 = underconfidence

ε = error term

4.4.4 Correlation Analysis

Correlation analysis is conducted to establish if there is a relationship between two variables
which lie between a strong negative correlation and a perfect positive correlation. Pearson
correlation was employed to analyze the level of association between Investor Confidence and
Stock Market Reaction. The findings are presented in table 4.5 below.

Table 5: Correlations

Stock Market
Reaction Overconfidence Underconfidence
Stock Market Pearson 1 -.067 .091
Reaction Correlation

29
 Sig. (2- .407 .260
tailed)
N 155 155 155
Overconfidence Pearson -.067 1 -.249**
Correlation
Sig. (2- .407 .002
tailed)
N 155 155 155
Underconfidence Pearson .091 -.249** 1
Correlation
Sig. (2- .260 .002
tailed)
N 155 155 155
**. Correlation is significant at the 0.01 level (2-tailed).
Source: Author (2019)

The findings of the correlation analysis indicate that there was a correlation of all the predictor
variables to the response variable. From the table, overconfidence showed a negative correlation
or weak correlation coefficient of -0.067 with stock market reaction, implying that an increase in
overconfidence is associated with a decrease in stock market reaction. Underconfidence also
showed a positive correlation of 0.091 with stock market reaction meaning that as the level of
underconfidence increases, stock market reaction also increases.

30
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction
This chapter summarizes the findings of the previous chapter, gives a conclusion and limitations
encountered in the study. This chapter also presents the implications of the result findings and
policy recommendations to different policy makers. Lastly, the chapter makes suggestions for
further areas of research that can be useful to future scholars and researchers.

5.2 Summary of findings

The objective of the study was to examine the effect of Investor Confidence on Stock Market
Reaction in Kenya. Investor Confidence was selected as the independent variable while Stock
Market Reaction was selected as the dependent variable. The study adopted descriptive and
explanatory research designs. Secondary data was extracted from the NSE database and was
analyzed using both Excel and SPSS software version 20. The study used annual data covering a
period of five years from January 2014 to December 2018.

The study found out that Investors’ Confidence has no significant effect on Stock Market
Reaction in Kenya. The model summary revealed that the independent variables :
Overconfidence and Underconfidence explains only 1% of deviations in the dependent variable
as indicated by the value of R2 which means that there are other variables not included in the
model that account for 99% of deviations in the stock market reaction in Kenya. The model was
found not to be fit at 5% significance level since the p-value of 0.452 is greater than 0.05. This
implies that overall the multiple regression model is statistically insignificant, in that it is not a
suitable model when it comes to explaining stock market reaction at the Nairobi Securities
Exchange.

The coefficient of the determination R2 was 0.010 which means about only 1% of the deviations
in stock market reaction measured by abnormal returns at the Nairobi Securities exchange
occurred because of the variations in investor confidence levels. Other variables not included in
the study accounted for 99% of the changes in levels of stock market reaction. The results from
Analysis of Variance show that the F statistic was not significant at 5% level with a p=0.452,

31
therefore the regression model was not fit to explain the relationship between the selected
variables.

The overconfidence variable had a weak correlation coefficient with stock market reaction as
shown by the negative correlation of -0.067 implying that an increase in overconfidence is
associated with a decrease in stock market reaction. Underconfidence showed a positive
correlation of 0.091 with stock market reaction implying that as the level of underconfidence
increases, stock market reaction also increases.

From the analysis, the study findings differ with the existing literature for instance the study
done Abel and Mariem (2013) who researched on the effect of investor confidence bias on the
decisions made by investors, relating to the relationship between overconfidence, volume of
transactions and volatility. The result findings stated that excessive trading of shares and investor
confidence contributed to excessive volatility and found that the beta coefficient had a positive
significant level of trading volume in the Tunisia stock exchange. Moreover Metwally and
Darwish (2015) reported that overconfidence had a positive and statistically significant effect on
stock market reaction. Statman et al (2006) result findings were also inconsistent with the
findings in this study because the results showed that there was a positive and highly significant
association between share turnover and delayed market returns.

This study was in agreement with Makokha (2012) in her study to examine the effect of
overconfidence bias on stock returns of companies listed at the Nairobi Securities Exchange. The
result findings were that the overconfidence bias at the Nairobi Securities Exchange was
negatively related to stock returns but their relationship was statistically insignificant.  Moreover,
a study done by Cherono (2018), also revealed that the overconfidence variable had a negative
and statistically significant effect on stock market reaction in Kenya. This implied that increase
in investor overconfidence would lead to a decrease in stock market reaction.

5.3 Conclusion
From the study findings and discussions, stock market reaction in Kenya is not significantly
affected by investors’ confidence. Investors’ overconfidence showed a weak correlation
coefficient of -0.067 with stock market reaction while investors’ underconfidence showed a
positive correlation with stock market reaction. The study also found that investors’
overconfidence had a negative but insignificant effect on stock market reaction, while investors’

32
underconfidence had a positive but insignificant effect on stock market reaction. The study
therefore concludes that increase in investors’ overconfidence does not necessarily lead to an
increase in stock market reaction in Kenya, while investors’ underconfidence to some extent has
an influence on stock market reaction in Kenya, though not to a significant extent.

The study findings also indicated the overall model selected for the purpose of this study is
statistically insignificant implying it cannot be used to predict stock market reaction in Kenya.
The fact that the two independent variables only explain 1% of deviations in stock market
reaction, means that there are other variables not included in the study that significantly affect
stock market development.

5.4 Recommendations
The Nairobi Security Exchange, which is regulated by the Capital Markets Authority, has a
major function in the economy since the investments and market returns signify the level of
economic activity in the country. To ensure that the NSE continues to develop the economy, the
CMA should consider relaxing listing requirements, safeguard a more transparent stock market
and increase public awareness. In turn, this will attract more companies to be listed at the
exchange, therefore enhancing more efficiency and liquidity in the Kenyan Stock Market since
the number of players will have increased in the market.

Both the CMA and the NSE should work together to improve the modelling of stock prices so as
to reflect the flow of information and factor in some behavioral attributes that affect the Kenyan
stock market. By achieving this, transparency and investor confidence will be increased in the
stock market. Moreover, the study recommends that CMA should advise investors on irrational
behavioral biases that could drive the stock prices away from their intrinsic values in the stock
market. The trading activities should be disclosed to the investors, to ensure that they make
rational and informed decisions when deciding on the strategies for investment.

The study recommends that the CMA should put forth a strong regulation framework in order to
strengthen market oversight and surveillance. The NSE trading system should be under
continuous monitoring to increase information efficiency and allocation efficiency in the market.
This will lead to increased awareness of the different investor opportunities at the NSE and
increased confidence among the investors to actively participate in the market.

33
The NSE should encourage investors to seek information about the fundamental values of listed
stocks. Investors should take into consideration the market sentiments as they make their
investment decisions at the NSE. Market players should analyze the different types of sentiments
in the market, whether there is a bearish or bullish sentiment in the market as well as considering
the market risks. Furthermore, investors should be on the lookout for market bubbles that affect
the stock prices intrinsic values. There are positive and negative bubbles in security prices, a
positive bubble occurs when the security prices are higher than their intrinsic values, whereas a
negative bubble occurs when security prices are lower than their intrinsic values.

5.5 Limitations of the study

The reliability and accuracy of the historical data used to obtain results for the study is only
precise as captured in the data source, as any rounding off is known to greatly affect the
efficiency of data. The data used was only for the period January 2014 to December 2018. There
is a possibility that data for the independent and dependent variables for different time periods
may give slightly different results especially in cases where there is variation in business cycles
variation in one of the periods under study. The study also employed secondary data, which had
already been collected and was available in the public domain, unlike primary data, which is
first-hand information.

The scope for this research was only for five years, that is 2014-2018. It has not been determined
if the result findings would hold for a longer study period. A longer study period is more reliable
as it will take into account major economic conditions such as the business cycles. Moreover, it
is uncertain whether similar findings would be observed beyond December 2018.

Due to the cost of acquiring the data from the NSE database and the time factor for collecting
data, the study was not done on all the companies listed at the NSE, as only data for 31
companies out of the 65 listed companies were collected.

The research assumed that all the 31 sampled companies are structured the same way; they
therefore make profits and losses in a similar manner and under similar conditions, which is not
practically true.

The model used in this study was found to be insignificant in explaining the relationship between
the selected variables. For purposes of data analysis, the researcher applied the multiple linear

34
regression model. The utilization of the model involved shortcomings such as the generation of
erroneous results when the values of the variables change, therefore the researcher cannot be able
to generalize the findings with certainty. The addition of more and more data to the regression
model, leads to the hypothesized relationship between the selected variables not to hold.

5.6 Suggestions for further research

This study did not exhaust all the variables that affect stock market reaction in Kenya. The study
only focused on one type of behavioral variable that is, investor confidence. Therefore, further
studies can be done on other variables such as confirmation bias, familiarity bias and self-
attribution bias.

The study was based on descriptive and explanatory research designs only, on the effect of
investor confidence on stock market reaction at the Nairobi Securities Exchange. Therefore, a
similar study could be undertaken through other research designs on the same topic, which may
produce new insights that generate additional information that will be useful in this particular
field of study.

The study only used secondary data to gather information for the research project, since it was
readily available. A similar study could be conducted while employing primary data especially
when collecting information on investor confidence.

The scope for this research was only for five years because of the time barrier for collecting data.
Future studies may concentrate on a longer time period for the study and use of a different model
to affirm or disapprove the result findings of this study.

The research was only done for some companies operating in Kenya; therefore, the study
suggests that a cross sectional study be done for the other East African listed companies so as to
compare the level of stock market reaction in different countries.

Lastly but not least, since the regression model was not fit to predict stock market reaction in
Kenya; other models such as the Panel EGLS Period Random Effect Model and Vector
Autoregressive Model (VAR) and tests like the Heteroskedasticity Test can be used to explain
the various relationships between the selected variables.

35
36
 REFERENCES
Abel, B., & Mariem, T. (2013). The Impact of Overconfidence on Investors' Decision. Business
and Economic Research , 53-73.

Aduda, J., & Muimi, P. (2011). Test for Investor Rationality for Companies Listed at the Nairobi
Stock Exchange. Journal of Modern Accounting and Auditing, 7(8), 827-840.

Babajide, A. A., & Adetiloye, K. (2012). Investors’ Behavioural Biases and the Security Market:
An Empirical Study of the Nigerian Security Market . Accounting and Finance Research,
1(1), 219-229.

Bakar, S., & Yi, C. N. (2016). The Impact of Psychological Factors on Investors’ Decision
Making in Malaysian Stock Market:A Case of Klang Valley and Pahang. Procedia
Economics and Finance, 35, 319-328.

Ball, R., & Brown, P. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal
of Accounting Research, 6(2), 159-178.

Barako, D. G. (2007). Determinants of voluntary disclosures in Kenyan companies annual

reports. African Journal of Business Management, 1(5), 113-128.

Barber, B. M., & Odean, T. (2001). Boys Will be Boys: Gender, Overconfidence, and Common
Stock Investment. The Quarterly Journal of Economics, 116(1), 261-292.

Barberis, N., Shleifer, A., & Vishny, R. W. (1997). A Model of Investor Sentiment.
Massachusetts: National Bureau of Economic Research.

Bashar, A. K., & Hammash, F. Y. (2017). Are Amman Stock Exchange Investors
Overconfident? International Journal of Economics and Financial Issues, 7(2), 7-10.

Bitok, J., Tenai, J., & Rono, L. (2010). Determinants of investor confidence for firms listed at the
Nairobi stock exchange, Kenya. International Journal of Finance and Management, Vol.
1, Issue 2, pp., 160-173.

Boussaidi, R. (2013). Overconfidence Bias and Overreaction to Private Information. Social and
Behavioral Sciences, 81, 241 – 245 .

37
Bowman, R., & David, I. (1998). Short-run overreaction in the New Zealand stock market.
Pacific-Basin Finance Journal, 475-491.

Brooks, C. (2008). Introductory Econometrics for Finance. New York: Cambridge University
Press.

Brown, K. C., & Harlow, W. V. (1988). Market overreaction: Magnitude and intensity. The
Journal of Portfolio Management, 14(2), 6-13.

Bryman, A. (2012). Social Research Methods. New York: Oxford University Press.

Bryman, A., & Bella, E. (2011). Business Research Methods. Ethics in Business Research, 7(5),
23-56.

Cherono et al. (2018). Effect of Investor Overconfidence Behavior on Stock Market Reactions
in. The Open Journal of Economics and Finance, 2, 65-70.

Cherono, I. (2018). Effect of Investor Behavior on Stock Market Reaction in Kenya. Nairobi:
Jomo Kenyatta University of Agriculture and Technology.

Chidi, I. S., Agu, O. D., & Ande, H. (2013). To what Extent did Changes in Stock Prices
influence Investors’ Confidence on the Nigerian Stock Exchange? Research Journal of
Finance and Accounting, 4(19), 1-11.

Cooper, D. R., & Schindler, P. S. (2003). Business Research Methods. New York: McGraw-
Hill/Irwin.

Daniel et al. (1998). Investor Psychology and Security Market under- and Overreactions. The
Journal of Finance, 53(6), 1839-1885.

Daniel, K., & Titman, S. (2000). Market Efficiency in an Irrational World. Massachusetts:
National Bureau Of Economic Research.

Daniel, K., Hirshleifer, D., & Avanidhar, S. (1997). Investor Psychology and Security Market
Under and Overreaction. Advances in Behavioral Finance, 2, 460-501.

De Bondt, W. F., & Richard, T. (1995). Financial Decision-Making In Markets And Firms: A
Behavioral Persepective. Massachusetts: National Bureau Of Economic Research.

38
De Bondt, W. F., & Thaler, R. (1985). Does the Stock Market Overreact? The Journal of
Finance, 40(3), 793-805.

Fama, E. F. (1965). The Behavior of Stock Market Prices. The Journal of Business, 38(1), 34-
105.

Fama, E. F. (1970). Efficient Capital Markets: A Review Of Theory And Empirical Work. The
Journal of Finance, 25(2), 383-417.

Farag, H. (2014). Investor overreaction and unobservable portfolios: evidence from an emerging
market. Journal of Applied Financial Economics, 24(20), 1313-1322.

Fraenkel, J. R., & Wallen, N. E. (2000). How to Design and Evaluate Research in Education.
New York: McGraw Hill.

Frank, A. (2004). Stock market over and under-reaction: Evidence from investor psychology.
Investment Analysts Journal, 33(59), 5-14.

Griffin, J. M., Nardari, F., & Stulz, R. M. (2007). Do Investors Trade More When Stocks Have
Performed Well? Evidence from 46 Countries. The Review of Financial Studies, 20(3),
905-951.

Grinblatt, M., & Kelorhaju, M. (2008). Sensation Seeking, Overconfidence, and Trading
Activity. Journal of finance, 549-578.

Henker, J., & Henker, T. (2010). Are retail investors the culprits? Evidence from Australian
individual stock price bubbles. The European Journal of Finance, 281-304.

Hoffmann, A. O., & Post, T. (2016). How Does Investor Confidence Lead to Trading? Linking
Investor Return, Experiences, Confidence, and Investment Beliefs. Journal of Behavioral
and Experimental Economics, 12, 65-78.

Ilaboya, J. O., & Aggreh, M. (2013). Dividend Policy and Share Price Volatility. J. Asian Dev.
Stud, 2(2), 109-122.

Jacob, C., Cohen, P., West, S. G., & Aiken, L. S. (2003). Applied Multiple
Regression/Correlation Analysis for the Behavioral Sciences . New Jersey: Lawrence
Erlbaum Associates, Inc.

39
James, N. E. (2017). Financial Ethics and Investor Confidence Among Members of the Nairobi
Securities Exchange, Kenya. Nairobi: Kenyatta University.

Jegadeesh, N., & Sheridan, T. (1993). Returns to Buying Winners and Selling Losers:
Implications for Stock Market Efficiency. The Journal of Finance, 48(1), 65-91.

Kaestner, M. (2006). Investors' Misreaction to Unexpected Earnings: Evidence of Simultaneous

Overreaction and Underreaction. Montpellier: Montpellier University.

Kafayat, A. (2014). Interrelationship of biases: effect investment decisions ultimately .

Theoretical and Applied Economics , 85-110 .

Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk.
Econometrica, 263-292.

Kengatharan, L., & Kengatharan, N. (2014). The Influence of Behavioral Factors in Making
Investment Decisions and Performance: Study onInvestors of Colombo Stock Exchange,
Sri Lanka . Asian Journal of Finance & Accounting, 69(1), 1-23.

Ko, K. J. (2017, October). Economics Note: Investor Confidence. Retrieved from The U.S.
Securities and Exchange Commission: https://www.sec.gov

Kothari, C. R. (2004). Research Methodology Methods and Techniques. New Delhi: New Age
International (P) Ltd, Publishers.

Kurasawa, M., & Mardyla, G. (2008). Investor Confidence, Short-Sales Constraints, and the
Behavior of Security Prices. Journal of Behavioral Economics and Finance, 1, 41-48.

MacKinlay, C. A. (1997). Event Studies in Economics and Finance. Journal of Economic

Literature, 13-39.

Makokha, K. C. (2012). The Effect Of Over Confidence Bias On Stock Retruns Of Companies
Listed At The Nairobi Securities Exchange. Nairobi: Unpublished MBA Project,
University Of Nairobi.

Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics. The Journal of Economic
Perspectives, 17(1), 59-82.

40
Marchand, M. (2012). Behavioral biases in financial decision making. Tilburg: Tilburg
University.

Mardyła, G. (2012). The Strength and Weight of Information and Investor Confidence in
Financial Markets. The Ritsumeikan Economic Review, 61(1), 131-145.

Maringa, E. K. (2018). Market Reaction to Dividend Announcements: Analysis at Nairobi

Securities Exchange . International Journal of Finance and Accounting, 3(1), 48-65.

Maysami, C. R., Howe, C. L., & Hamzah, A. M. (2004). Relationship between Macroeconomic
Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of
Singapore’s All-S Sector Indices . Jurnal Pengurusan, 24, 47-77.

Meier, C. (2018). Aggregate Investor Confidence in the Stock Market. Journal of Behavioral
Finance, 19(4), 1-13.

Metwally, A. H., & Omneya, D. (2015). Evidence of the overconfidence bias in the Egyptian
stock market in different market states. International Journal of Business and Economic
Development, 3(3), 35-52.

Moskowitz, T. J., & Grinblatt, M. (1999). Do Industries Explain Momentum? The Journal of
Finance, 54(4) , 1249-1290.

Mugenda, O. M., & Mugenda, A. G. (2003). Research Methods: Quantitative & Qualitative
Approaches. Nairobi: Center for Technology Studies (Acts) Press.

Muller, C. (1999). Investor overreaction on the Johannesburg Stock Exchange. Investment

Analyst Journal, 28(49), 5-17.

Mwangi, K. W. (2012). The Effect of Behavioral Factors on Investment Decisions at the Nairobi
Securities Exchange. Nairobi: University of Nairobi.

Ngugi, W. F. (2017). FACTORS INFLUENCING SHARE PRICE VOLATILITY OF FIRMS

LISTEDAT THE NAIROBI SECURITIES EXCHANGE. Nairobi: The Catholic University
of Eastern Africa.

Njoroge, M. (2019, May 29). Investor wealth at the NSE drops to Sh2.28 trillion. Retrieved from
Business Today: https://businesstoday.co.ke

41
Odean, T. (1998). Volume, Volatility, Price, and Profit When All Traders Are Above Average.
The Journal of Finance, 53(6), 1887-1934.

Osei, K. A. (2002). Asset pricing and information efficiency of the Ghana Stock Market. Nairobi:
The African Economic Research Consortium.

Rono, H. C. (2013). STOCK PRICE REACTION TO EARNINGS ANNOUNCEMENTS.

Johannesburg: University of the Witwatersrand.

Shefrin, H., & Statman, M. (2011). Behavioral Finance in the Financial Crisis: Market
Efficiency, Minsky and Keynes. Santa Clara University.

Soares, J. V., & Serra, A. P. (2005). “Overreaction” and “Underreaction”: Evidence for the
Portuguese Stock Market. Porto: Faculdade de Economia da Universidade do Porto .

Sohail, A., Rehman, M. U., & Javid, A. Y. (2017). STOCK MARKET REACTIONS ON
RETURNS AND TRADING VOLUME: THE IMPACT OF THE GLOBAL
FINANCIAL CRISIS . REVISTA EVIDENCIAÇÃO CONTÁBIL & FINANÇAS , 132-
151.

State Street Corporation. (2019). Your Investor Confidence Index. Retrieved from State Street:
http://www.statestreet.com

Statman, M., Thorley, S., & Vorkink, K. (2006). Investor Overconfidence and Trading Volume.
The Review of Financial Studies, 19(4), 1531-1565.

Stout, L. A. (2002). The Investor Confidence Game. Brooklyn Law Review, 68(2), 408-437.

Sturm, R. R. (2003). Investor Confidence and Returns Following Large One-Day Price Changes.
Journal of Behavioral Finance, 4(4), 201-216.

Sunday, F. (2018, October 8). Stock market jitters as investors react to new taxation measures .
Retrieved from Standard Media: https://www.standardmedia.co.ke

Tariq, B., & Ullah, N. U. (2013). Investor Overconfidence and Stock Returns: Evidence from
Pakistan. Journal of Business and Management, 8(1), 77-84.

42
Thaler, R. H., Tversky, A., Kahneman, D., & Schwartz, A. (1997). The Effect of Myopia and
Loss Aversion on Risk Taking: An Experimental Test. The Quarterly Journal of
Economics, 112(2), 647-661.

Tversky, A., & Kahneman, D. (1981). The Framing of Decisions and the Psychology of Choice.
Science, New Series, 211(4481), 453-458.

Ullah, I., Ullah, A., & Rehman, N. U. (2017). Impact of Overconfidence and Optimism on
Investment Decision. International Journal of Information, Business and Management,
9(2), 231-243.

Waweru, M. N., Munyoki, E., & Uliana, E. (2008). The effects of behavioural factors in
investment decision-making: a survey of institutional investors operating at the Nairobi
Stock Exchange. International Journal of Business and Emerging Markets, 1(1), 24-41.

Weber, M., & Welfens, F. (2007). How do Markets React to Fundamental Shocks? An
Experimental Analysis ojn Underreaction and Momentum. Mannheim: University Of
Mannheim.

Werah. (2006). A survey of the influence of behavioral factors on investor activities at the
Nairobi Stock Exchange. Nairobi: Unpublished MBA Research Proposal, University Of
Nairobi.

Yartey, C. A. (2008). The Determinants of Stock Market Development in Emerging Economies:

Is South Africa Different? IMF Working Paper, 08/38. Washington DC: International
Monetary Fund.

Zafar, N. (2017). Behavioral Biases and Stock Market Reactions: A Study of Pakistani Market .
Islamabad: Capital Unversity Of Science and Technology.

43
 APPENDICES

Appendix I: Companies listed at the NSE as at 31st December 2018

AGRICULTURAL
Eaagads Ltd
Kapchorua Tea Co. Ltd
Kakuzi Ltd
Limuru Tea Co Ltd
Sasini Ltd
Williamson Tea Kenya Ltd
COMMERCIAL AND SERVICES
Atlas African Industries Ltd
Deacons East Africa Plc
Eveready East Africa Ltd
Express Ltd
Kenya Airways Ltd
Longhorn Publishers Plc
Nairobi Business Ventures Ltd
Nation Media Group Plc
Standard Group Plc
TPS Eastern Africa (Serena) Ltd
Uchumi Supermarket Plc
WPP Scangroup Plc
TELECOMMUNICATION
Safaricom Plc
AUTOMOBILES AND ACCESSORIES

44
Car and General (K) Ltd
Sameer Africa Plc

BANKING
Barclays Bank Kenya Ltd
BK Group Plc
I&M Holdings Ltd
Diamond Trust Bank Kenya Ltd
HF Group Plc
Kenya Commercial Bank Plc
National Bank of Kenya Ltd
NIC Group Plc
Stanbic Holdings Plc
Standard Chartered Bank Kenya Ltd
Equity Group Holdings Plc
The Co-operative Bank of Kenya Ltd
INSURANCE
Jubilee Holdings Ltd
Kenya Re-Insurance Corporation Ltd
Liberty Kenya Holdings Ltd
Britam Holdings Plc
CIC Insurance Group Ltd
Sanlam Kenya Plc
INVESTMENT
Olympia Capital Holdings Plc
Centum Investment Co Plc
Trans-Century Plc
Home Afrika Ltd

45
Kurwitu Ventures Ltd
INVESTMENT SERVICES
Nairobi Securities Exchange Plc
MANUFACTURING AND ALLIED
B.O.C Kenya Plc
British American Tobacco Kenya Ltd
Carbacid Investments Plc
East African Breweries Ltd
East African Cables Ltd
Flame Tree Group Holdings Ltd
Kenya Orchards Ltd
Mumias Sugar Co. Ltd
Unga Group Ltd
CONSTRUCTION AND ALLIED
ARM Cement Ltd
Bamburi Cement Ltd
Crown Paints Kenya Ltd
E. A Cables Ltd
E. A Portland Cement Ltd
ENERGY AND PETROLEUM
KenolKobil Ltd
Total Kenya Ltd
KenGen Ltd
Kenya Power & Lighting Co Ltd
Umeme Ltd
REAL ESTATE INVESTMENT TRUST
Stanlib Fahari I-REIT
EXCHANGE TRADED FUNDS

46
Barclays New Gold ETF

Appendix II: Sample of 31 Companies that formed part of the NSE 20 Index within the
period 2014-2018.
COMMERCIAL AND SERVICES
Express Kenya Ltd
Nation Media Group Plc
WPP-Scangroup Plc
Kenya Airways Ltd
Uchumi Supermarket Ltd
AGRICULTURAL
Sasini Ltd
Kakuzi Ltd
BANKING
KCB Group Plc
The Cooperative Bank of Kenya Ltd
Diamond Trust Bank Ltd
Barclays Bank of Kenya Ltd
Equity Group Holdings Plc
Stanbic Holdings Plc
Standard Chartered Bank Kenya Ltd
NIC Group Plc
MANUFACTURING AND ALLIED
East African Breweries Ltd
East African Cables Ltd
British American Tobacco Kenya Ltd
ARM Cement Plc
Bamburi Cement Ltd
Mumias Sugar Ltd
ENERGY AND PETROLEUM
KenolKobil Ltd
Kenya Power & Lighting Ltd
Kengen Ltd
Total Kenya Ltd
INSURANCE
Britam Holdings Plc
Kenya Reinsurance Corporation Ltd
CIC Insurance Group Ltd
TELECOMMUNICATION AND TECHNOLOGY
Safaricom Plc
INVESTMENT
Centum Investment Company Plc
INVESTMENT SERVICES

47
Nairobi Securities Exchange Plc

48