Growth of the Nairobi Stock Exchange primary market
Discussion Paper No. 47
Abstract
The study explores the development of the Nairobi Stock Exchange primary market since its inception in 1953. To understand the factors influencing growth of the market, the study uses a historical perspective approach. This captures the factors surrounding the development of the market, using a sample of 20 firms that had made public offers since 1980..
The market has witnessed slow growth in the number of listed firms. The number of firms listed in 2005 is less than that at independence (1963). There are very few locally-owned firms and there has been a significant number of delistings. There are on-going attempts to establish a second-tier market, which would accommodate firms that do not meet the listing requirement but have the potential to grow. However, unless the culture of share trading is well cultivated, such a move may not be sustained. Therefore, mass education on the stock market operations is important to the business community. Similarly, if the business environment is such that it threatens the growth and survival of the firms, the prospects of having such firms listing even in the second-tier market are very slim. The government needs to sustain a favourable business environment to reduce the risk of growth and survival of such firms.
Firms listing at the market are driven by the need to grow their productivity by investing in technology, the need to strengthen their capital base and the need to dilute shares through privatization. The benefits of going public include increased investment, profitability and growth opportunities and also easing the financial constraints. However, this has not attracted more entrants, may be because firms do not understand the benefits of going public or the cost of doing so. Mass education at firm level on the benefits of going public is important, with clear examples from those who have managed to reap benefits. In addition, it is important to carry out a study relating the costs and benefits of going public to the probability of firms listing.
The response to various tax incentives is highly inelastic. Although over the period the stock exchange has lobbied the government for tax incentives, the response from firms has been poor. The tax incentives provided are coupled with rising implicit and explicit listing costs. It may be that such costs out-weigh the benefits of tax incentives. Therefore, tax incentives need to be accompanied by efforts to strengthen the institutional setup with credit bureau and underwriter services. It is also important to understand the link between the capital structure and tax incentives.
Political relationships in the East African region are a major factor that influences the market scope of the Nairobi Stock Exchange. The on-going efforts towards regional integration are a potential source of expanded market scope for listings. Privatization has also made a significant contribution to the growth of the market. Therefore, encouraging privatization of strategic parastatals through the stock market will be a major boost for the market. Finally, stable macroeconomic conditions determine the performance of the firm and therefore the ability to satisfy the benefits of the shareholders. Sustaining a favourable macroeconomic environment will attract firms and investors to share trading.
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