EFFECT OF FOREIGN EXCHANGE RATES VOLATILITY ON SHARE PRICES OF LISTED FIRMS IN KENYA

Since 1993 when the floating exchange rate regime was established in Kenya, the country has experienced tumultuous times regarding fluctuations in exchange rates. This continuous volatility has increased foreign exchange risk exposure which in turn has raised transaction costs of companies. Naturally, higher transaction costs results in lower profitability which subsequently affects the market prices of traded stocks. During the period 2008 to 2015, the Kenyan currency market experienced significant fluctuations in exchange rates – topping at the all-time high of Kshs 110 to the US dollar. This coincided with a period of depressed performance in the Nairobi Securities Exchange with regard to capitalization. This study sought to examine the effect of fluctuations in exchange rates on share prices of the listed companies in Kenya. Both the flow-oriented theory of exchange rates and efficient market hypothesis formed the theoretical foundation of the study. The study employed a longitudinal research design and a census of all the 61 listed companies was taken. The study utilized secondary data on the daily mean exchange rates between Kenyan shillings and United States Dollar and daily mean share prices for the 8 years period from January 2008 to December 2015.The relevant diagnostic tests for time series linear regression analysis were conducted to determine suitability of the collected data for the study. Regression analysis was performed to analyze the data. Both the F and t-tests were used at 5% significance level to test the significance of the overall model and coefficient of the independent variable respectively. The results of the study showed that exchange rates volatility had a significant adverse effect on the share prices. Based on this empirical finding, the study recommended that the managers of the Kenyan monetary system should adopt policies that promote stable exchange rate regime. Further, the study advocated for fast-tracking of the impending launch of the derivatives market in NSE to enable effective mitigation of the negative impact of exchange rates volatility in the economy.