Market value ratios, institutional ownership structure and stock price volatility of listed Companies in Nairobi securities exchange, Kenya

Abstract

Stock price volatility is broadly considered to be one of the components that impact the confidence of investors in global money markets. Market value ratios have been found to have a predictive power on ensuing stock prices, which influence information on firm performance and ultimately reduces stock price volatility. The riddle remains unsolved in reference to the factors which have greater effect on stock price volatility. This study examined the association between each of the five selected market value ratios namely; market to book value ratio, book value per share, earnings per share, dividend yield and price earnings ratio on volatility of share price of listed firms on NSE. The study also determined institutional ownership’s moderation on the association between market value ratios variables and volatility of share price. The study was guided by Efficient Market Hypothesis Theory, seconded by the theory of Value Relevance, Signalling Theory and Agency Theory. Positivism research philosophy and explanatory research design was adopted by the study to source secondary data from 39 listed firms at NSE from 2008 to 2019. Secondary data used in the study was sourced from the NSE Handbook and published annual reports of the listed firms. The data analysis approaches adopted were descriptive, correlation and panel data regression to evaluate the association between market value ratios variables and stock price volatilities. The findings indicated that control variables firm size and firm growth were significant to affect volatility of share price. R-square was 29%, Market value to book value (β = −.0161, p = .000 < .05), Earnings per share (β = −.002, p = .000 < .05), Book value per share (β = −.0003, p = .000 < .05) Dividend yield (β = −.476, p = .000 < .05) and institutional ownership structure (β = −.071, p = .006 < .05) negatively and significantly influenced stock price volatility. Further institutional ownership structure moderated the relationship between Market price to book value (β = 0.01, ρ = 0.01 <.05, R2Δ =.01), Price earnings ratio (β=.003, p = 0.00 <.05, R2 Δ =.01), Dividend yield (β=1.470, p = 0.006 <.05, R2Δ =.01) and volatility of share price. However, there was insignificant moderation of institutional ownership on the association between earnings per share and volatility of share price (β = 0.00, ρ=0.497>0.05) and an insignificant moderating effect on the relationship between book value per share and volatility of share price (β = 0.00, ρ=0.07>.05). The study concluded that market value ratios influence volatility of share price. Also, institutional ownership structure moderates the relationship between market to book value ratio, price earnings ratio, dividend yield and volatility of share price. The findings of this study comprise the information ingredients that are suggested in the efficient market theory, theory of value relevance, signaling theory and agency theory thus supporting these theories. The study recommended that Central Bank of Kenya should come up with effective policies to curtail the impact they have on the the stock market. Firms listed on NSE should also maintain an acceptable dividend policy to both prospective and existing investors. Management should also formulate a dividend policy that minimizes stock price volatility. Further studies should be carried out on other possible variables and their influence on the stock price volatility. Other studies should also carried out within other time frames and other stock exchanges, or on the association between manipulated market value ratios or irregular or inconsistent dividend policy and stock prices volatility.