MACROECONOMIC FACTORS AFFECTING FINANCIAL PERFORMANCE OF FIRMS LISTED IN THE NAIROBI SECURITIES EXCHANGE

CHAPTER ONE

1.1 Background of study
This study plans to ascertain the effect of macro-economics factors on the performance of firms
listed in the Nairobi Securities exchange. This background of study presents the concepts of
macro-economic factors, securities market performance, the effect of macroeconomic variables
on performance of firms listed in the Nairobi Securities Exchange, and a brief history of the
Nairobi securities exchange. The Chapter will also include the research objectives, research
questions, justification of the study and scope. Limitations and delimitation of the study will also
be discussed
1.1.1 Macro-economic factors
Macroeconomic factors have diverse effect across the economic spectrum and according to
(Olukayode, 2009) macroeconomic variables are variables that control the macro-economy in its
entirety. These variables include Interest rates, Gross Domestic Product (GDP), rate of exchange,
level of inflation rate, consumer price index, index of the stock market and government
spending. These factors are significant in economics as they mostly determine the welfare of the
economy. Growth and development of the economy involves investments that requires long-term
funding that is able to extend beyond the duration of time that savers are willing to commit their
funds. Capital markets are considered to be central to the economy as they react instantly to
radical changes in the economy. Capital Markets stimulate savings and real investments in any
healthy economy, as savings are directed into real investments, increasing capital stock thereby
spurring economic growth of the country. This character makes it possible for the observable
minds to feed the impulse of such an economy. The external disruptions are the macroeconomic

pointers that cause variation in the stock prices movements. The changes are often mirrored by
the extent and direct movement in stock prices, market index and liquidity of the market
(Olukayode, 2009)

1.1.2 Securities Market Performance
Capital Market is said to be efficient when security prices adjust swiftly to new information thus
security prices reflect up to date status of the securities at any given moment. (Frimpong, 2009)
states that no investor should be able to employ ready information in order to predict stock price
movements quickly enough so as to make profit through trading shares.

Securities Market plays a key role as a financial intermediary in developing and developed
countries in the world by directing idle funds form surplus to deficit units in the economy. A
growing and developing economy demands more resources to meet the fast expansion. Securities
market comes in handy to mobilize and allocate savings among competing uses which are very
significant to the growth and efficiency of the economy (Alile, 1984) . The Performance of the
securities market is reflective of the overall development of the economy and empirical
evidences have proofed that development of the capital markets are central to the economic
growth.

1.1.3 Effect of Macroeconomic Factors on Performance of Firms listed on the Securities
Exchange
Macroeconomic variables hugely affect the financial performance of firms across the world
(Zeitun, 2007) . For many years the interconnection of the capital market and macroeconomic

variables has been a matter of interest amidst practitioners and financial economists. It is
assumed that securities prices are determined by some underlying macroeconomic variables
which include interest rate, exchange rate, Gross Domestic Product (GDP), money supply and
inflation. Incidental testament from the financial press points that investors accept that monetary
policy and macroeconomic occurrences have a great influence on the fluidity of the security
price. This alludes that macroeconomics variables could wield pressure on share returns which
can in turn influence investor’s decision making. This excites researchers to probe the
relationships between share prices and macroeconomic variables (Christopher, 2006)

Macroeconomic variables have grave effect on securities price movement and returns but the
theory of the relationship between macroeconomics variables and stock prices in not know with
surety as denoted by (Flannery M I & Propapadakes, 2002) . Efficient market hypothesis points
movements of security prices to new information that influences the anticipated discount rates or
future income. For instance, an efficient market embodies all current market information in stock
prices. New information is obtained instantly to mirror all inf