Effect of insider trading prohibitions: Regulation on security market returns in Kenya
Keywords:
Efficiency, Semi Strong Efficiency, Regulation, Event Methodology, Pre Regulation, Post RegulationAbstract
This paper provides an analysis of legal insider trading on the Nairobi Securities Exchange
(NSE) by using data published by security market. An event study methodology was used to
determine the unit of analysis. The causal research design was used on the event to find out
whether there was any significant difference between pre and post regulation by observing the
behaviour of abnormal returns and stock returns volatility. The sample comprised of 39
companies out a population of 55 companies that traded continuously from 1998 to 2010. The
market model was used to determine alpha and beta to calculate abnormal returns. The GARCH
model was used to find the significant difference between the pre and post regulation through
stock market volatility. The study results indicate that the regulation analysed had evidence of
abnormal returns that accumulated slowly over the event period of the regulation. The analysis of
regulation on insider trading shows high level of abnormal returns ranging from 0 to 8. The
regulation results indicate reduced volatility during the post regulation as indicated by the
GARCH model. Statistical analysis gives an F statistic of 242.5 while the critical F statistic is
3.85. The results indicate that investors viewed the regulation as good news to the market. There
was anticipation among the investors during pre-regulation as reflected by stock volatility during
the pre-regulation period. The study concludes that regulation of the capital market brings about
efficiency through reduced volatility and reduced abnormal returns after regulation is enacted by
the government.
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