SELECTED MACROECONOMIC VARIABLES AND STOCK PRICE PERFORMANCE OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
SELECTED MACROECONOMIC VARIABLES AND STOCK PRICE PERFORMANCE OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
Gachira Macharia Wilfred - Postgraduate Student, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
Dr. Daniel Makori (PhD) - Lecturer, Department of Accounting and Finance, School of Business Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
In Kenya, the Nairobi Securities Exchange (NSE) has faced valuation fragilities over the last decade, with market capitalization declining from Ksh 2.05 trillion in 2015 to below USD 20 billion by 2023, while the average Tobin’s Q has remained below unity, indicating persistent undervaluation of listed firms and raising concerns about price discovery and investor confidence in the market. The research overall objective was to examine the effect of selected macroeconomic variables on firm value of firms listed at the NSE. Specifically, the study assessed the effects of interest rates, inflation rates, exchange-rate movements, and external debt on firm value for the period 2015–2024, to establish how macroeconomic changes influence firm valuation dynamics in an emerging market context. The analysis was anchored on the Efficient Market Hypothesis, Arbitrage Pricing Theory, Fisher Effect Theory, and Firm Value Maximization Theory, which explain how macroeconomic fundamentals are transmitted into asset prices and shape investor expectations. A census of all 65 listed firms was conducted using secondary data obtained from the Capital Markets Authority, the Central Bank of Kenya, the Kenya National Bureau of Statistics, and the NSE, ensuring comprehensive coverage and reliability of the dataset. Firm value was measured using Tobin’s Q, while macroeconomic variables were proxied using annual percentage changes in the Central Bank Rate, Consumer Price Index, exchange rate, and the ratio of external debt to GDP. Diagnostic tests on normality, multicollinearity, heteroskedasticity, autocorrelation, and model specification confirmed data suitability, leading to the use of a fixed-effects panel regression model to control for unobserved firm-specific heterogeneity. The findings suggest that interest rates and inflation have a significant negative effect on firm value, inferring that higher borrowing costs and inflationary pressures suppress valuation. Conversely, exchange-rate movements and external debt exhibited a significant positive effect, suggesting that moderate currency depreciation and sustainable external borrowing enhance firm valuation. The study further established that macroeconomic conditions exert varying degrees of influence across firms, reflecting differences in sectoral exposure and financial structure. The results also indicate that external macroeconomic pressures play a critical role in shaping investor expectations and market performance over time. The study highlights the importance of maintaining a stable and predictable macroeconomic environment to support efficient capital market functioning. It further demonstrates that firm valuation in emerging markets remains highly sensitive to policy and macroeconomic signals. Additionally, the findings suggest that consistent macroeconomic policy direction enhances investor confidence and supports sustained market participation. The study concludes that macroeconomic stability is critical for improving firm value at the NSE and recommends enhanced coordination between fiscal and monetary authorities, improved macroeconomic policy transparency, expansion of exchange-rate risk management instruments, and prudent external debt management to strengthen investor confidence and promote capital market stability. These findings provide targeted insights for policymakers, investors, and corporate managers by demonstrating that tightening monetary conditions and rising inflation suppress firm valuation, while controlled exchange-rate depreciation and sustainable external borrowing enhance market performance among NSE-listed firms, thereby reinforcing the need for policy alignment that balances price stability with growth-oriented capital market outcomes. Ethical standards were upheld, with data sourced from accredited public institutions and applied appropriately in the study.
