Internal Equity Annual Changes and Security Returns of Companies Listed in The Nairobi Securities Exchange.

Abstract

This study examined the effect of annual changes in internal equity on ordinary equity security returns in Kenyan public limited firms. Internal equity is the portion of a company's equity generated through retained earnings and the issuance of new shares to existing shareholders. The study was guided by the research philosophy of positivism, given that it relied on quantitative data and espoused the scientific approach to research.  It adopted a causal or explanatory research design to check how the annual changes in public firms' internal equity impacted a firm's stock market value. A census study of 67 public companies was employed, of which 49 met data requirements. The study used secondary data from the company's financial statements for eleven years, from January 2012 to December 2022. The data collected was analyzed using descriptive and inferential statistics. The hypothesis that annual changes in internal debts had no significant effect on security returns was tested at a 95% confidence interval using the t-statistic and p-value. The study adopted panel data to carry out the research analysis. Panel regression analysis using the random effects model was undertaken after appropriate normality, model specification, homoscedasticity, linearity and autocorrelation diagnostic tests. Findings reveal significant variability in internal equity changes across sectors. Correlation analysis establishes a positive and significant association between internal equity changes and security returns. Panel regression analysis further confirms a strong and positive relationship, indicating that an increase in internal equity corresponds to higher returns on equity securities. The results emphasize the importance of internal equity in signalling a company's financial health and stability, impacting investor confidence and potentially leading to higher equity security returns. Investors are urged to conduct sector-specific analyses, considering variability in financial structures. The study contributes valuable insights to understanding internal equity's role in influencing financial well-being and security returns in the Kenyan business landscape.