Relationship between stock market characteristics, regulatory environment and economic growth in Kenya

Abstract

Globally, stock market characteristics are recognized as major drivers of economic growth, with indicators such as market capitalisation, stock turnover, foreign direct investment (FDI), and the quality of the regulatory environment playing a key role in resource mobilization and capital allocation. This study examined the relationship between stock market characteristics, regulatory environment, and economic growth in Kenya. The specific objectives were to assess the effects of stock market capitalisation, turnover, and FDI on economic growth and to evaluate the influence of the regulatory environment. Secondary data were obtained from the Kenya National Bureau of Statistics (KNBS), Nairobi Securities Exchange (NSE), and World Bank, covering 2000–2024. A descriptive research design was employed, and data were analysed using STATA version 17 after diagnostic tests confirmed the robustness of the model. The findings revealed that stock market capitalisation had a strong positive correlation with economic growth (r = 0.6883), indicating that expansion in the value of listed companies is associated with growth in GDP. Stock market turnover showed a moderately strong positive correlation with GDP (r = 0.6176), reflecting the importance of liquidity and trading activity in supporting economic expansion. Foreign direct investment exhibited a very strong positive relationship with GDP (r = 0.8442), showing its critical role in transferring capital, technology, and expertise to Kenya. The regulatory environment, proxied by the cost of listing, was positive but relatively weak (r = 0.4366), suggesting that further reforms are needed to fully unlock its growth-enhancing potential. The study concluded that Kenya’s stock market characteristics and FDI are directionally aligned with economic growth, but more needs to be done to deepen their impact on GDP. Based on these findings, the study recommended strengthening market depth by encouraging more listings on the NSE, promoting liquidity through investor education and market-making mechanisms, and reforming regulatory frameworks to enhance transparency and lower compliance costs. Furthermore, it recommended targeted strategies to attract and retain FDI, such as streamlining approval processes, expanding investment protection agreements, and providing tax incentives in priority sectors like manufacturing, renewable energy, and infrastructure to accelerate Kenya’s long-term economic growth.