Effects of inclusion in nse 20 share index on firm’s share market performance (A case of Mumias Sugar Co. LTD)

Abstract

The stock market is one of the most closely observed economic phenomenons in the world. Performance of a stock market is gauged on stock index, which also depends on performance of individual constituent stock. Therefore, stock inclusion in an index affects the stock, the index and the market at large. The argument that a stock’s inclusion in an index results in a share price increase was observed quite a long time ago in developed stock market index. However in frontier markets, especially Kenya, this phenomenon has not been adequately addressed. The aim of the study was to evaluate effects of inclusion in NSE 20 share index on firm’s share market performance. Specific objectives were; to determine effects of inclusion in NSE 20 share index on firm’s share return and, to establish effects of inclusion in NSE 20 share index on firm’s share market turnover. The study adopted an event study research design. Purposive sampling method was used to select only Mumias Sugar Company Ltd. for analysis from the target population of NSE 20 share index constituent companies. Secondary data from Nairobi Securities Exchange was analysis with the aid of STATA statistical package. Regression and correlation models together with parametric tests statistics (z-test) was used to analyse and test the hypothesis. Findings were presented using frequency tables, percentages, pie charts and graphs. The study found that Mumias Sugar Co. Ltd stock showed a rise in ARs towards index inclusion announcement, negative ARs towards the inclusion date and a low post inclusion ARs volatility. With stock turnover, the study found that the stock reported a drop in turnover ratio towards the announcement and inclusion dates but rose gradually after inclusion. Additionally, the stock yielded insignificant rise in share’s market price performance and significant change in market trading volume. The study concluded that index inclusion has a general positive effect on affected stock through rise in price (approximately 4.05%), insignificance rise in abnormal returns and significance increase in liquidity within the short-run period in a frontier capital market. The study recommended that stocks added to blue chips indices are viable investment options as they exhibit an above average return in the short-run. However, these returns are insignificance and thus cannot warranty speculative investment strategy when transaction cost are captured. The simple buy-and-hold strategy is the best due to exhibited upward trends in cumulative stock returns. Lastly, the study suggests further studies on effects of deletion from index on firms market share performance.