Stock market participation: Is it really an issue of information asymmetry ?

Stock market participation: Is it really an issue of information asymmetry?

A paper presented at the 10th ORSEA annual International conference held at the University of Nairobi School of Business, Lower Kabete Road,

NairobiOctober 16-18, 2014

ByZainabu TumwebazeLaura Orobia (PhD)

Assoc. Prof Nixon Kamukama (PhD)1

OPERATIONS RESEARCH SOCIETY OF EASTERN AFRICA

Structure of presentationStructure of presentation

Introduction Methodology Results Discussion and conclusions Implications

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IntroductionIntroductionThe stock exchange markets are a vital

source of capital for organizations (Alam et al., 2011; Jaswani, 2008; Zuravicky, 2005).

However, even as opportunities exist for accessing cheap financial resources through the Uganda Securities Exchange (USE), local firms in Uganda face challenges in obtaining long-term finance

Existing evidence indicates that the market size and activity at USE is still low (Katto, 2013) – untapped alternative

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Introduction Contd ... Introduction Contd ... Only 14 companies are listed on the USE with

market capitalization of $5.18bn as compared to Nairobi Securities Exchange (NSE) with 60 listed companies with market capitalization of $ 13.15bn. (Kato, 2013)

Previous studies also report that private firms that are privy to the benefits of stock exchanges seem to have avoided the stock market as means of raising capital (see Sejjaaka, 2011).

The main question therefore is why the low stock market participation on the USE?

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MethodologyMethodologyQuantitative and cross

sectional survey design

Study population – 164 private firms with chargeable incomes of above 50m shillings (business tax-payers, URA register, 2013)

Sample – 118 (Krejcie & Morgan, 1970); stratified simple random sampling

Data exploration - 107 usable observations

Sample characteristicsUnit of inquiryGender – Males (58%),

Females (42%).Age – 31 – 40 years (37%)Education – Bachelors

degree (38%)Unit of analysisBusiness age– over 10

years(75%), 5-10 years(25%)

Business type – Service (67%), Industry (30%), Agriculture (3%)

Annual income (U Shs) – 50m-100m(41%); 100m-500m (27%).

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Methodology cont…Methodology cont…Measurement of variables – scales developed by

previous scholars: Information asymmetryInformation asymmetry– item questions generated were to

capture the quality and quantity of information provided to enable accessing funds through the stock market exchange, thus, information quality and information quantity (Griffins, 2002; Nott, 2003; Afzal, Roland & Al-Suqri, 2008).

Stock market participation Stock market participation – item questions generated were to capture firms ‘going public/ trading shares’, thus, market capitalization and volume of trade (Dariusz, 2008)

Data processing, presentation and analysis - Statistical Package for Social Science (SPSS)

• Correlation analysis – to test associations between the study variables

• Regression analysis – test the contribution of the IVs to the DV. 6

Correlation resultsCorrelation resultsVariables 1 2 3 4 5 6Information quantity [1] 1

Information quality [2] .320**

1

Information asymmetry [3]

.780**

.842** 1

Market capitalization [4] .443**

.580**.635**

1

Volume of trade [5] .313** .400**.442**

.279**

1

Stock market participation [6]

.475** .617**.677**

.815**

.784** 1

**. Correlation is significant at the 0.01 level (2-tailed).

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Regression results _IARegression results _IA

Unstandardized Coefficients

Standardized Coefficients

t Sig.

BStd.

ErrorBeta    

(Constant) 1.236 0.179 6.901 0.000

Information asymmetry

0.573 0.061 0.677 9.437 0.000

R = .677; R2 = .459; Adj R2 = .454; F Stat= 89.01; Sig=.000, Durbin Watson = 1.943Dependent variable_stockmarket participation

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Regression results_IQlty_IQtyRegression results_IQlty_IQtyUnstandardized

CoefficientsStandardized Coefficients

t Sig.

BStd.

ErrorBeta    

(Constant) 1.273 .181   7.017 .000

Information quantity

.230 .056 .309 4.092 .000

Information quality

.332 .048 .518 6.843 .000

R = .683; R2 = .466; Adj R2 = .456; F Stat= 45.42; Sig=.000, Durbin Watson = 1.925 Dependent variable _Stockmarket participation

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Discussion and conclusionRelation between information asymmetry and stock market participation (Afzal et al, 2008; Chemmanur et al., 2010; Ekumah & Essel, 2003; Sejjaaka, 2011).Information quality included items such as ‘companies ensuring consistency in preparing financial statements’, the firms’ financial information being neutral and free from errors’ etc .Information quantity included items such as availing detailed information required to be listed on the USE, companies having adequate information about the opportunities at the USE etc.Conclusion; information asymmetry cannot be ignored if we are to see improvement in stock market participation.

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Study implicationsStudy implications Theoretical Theoretical – add to stock market literature that

information quality more than information quantity is highly correlated with stock market participation.

PracticalPractical – managers’ perspective - need to develop capacity to provide clear information; CMA’s perspective – increase awareness about its operation.

Study limitations and areas for further researchStudy limitations and areas for further researcho Lacks cross-validationo Cross-sectional surveyo Kampala specifics

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Thank you for

Listening

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