The Relationship Between Oil Prices And Share Prices Of Listed Manufacturing Firms In Kenya

Abstract

Oil prices comprise a significant cost component in manufacturing firms and this affects their bottom line. The main objective of this study was to find out how oil prices products; crude oil, diesel, and LPG affect the share price index of the listed manufacturing firms in Kenya. However, less is known about this relationship in Kenya. Oil transmission mechanism theory, equity pricing theory and efficient market hypothesis are the major theoretical reviews used in this study. This study adopted the use of descriptive research design to evaluate the relationship between oil prices and share prices of listed manufacturing firms in Kenya. A descriptive design was adopted since the author had no control over the variables and the variables were quantitatively tested and analyzed. The study used monthly data from September 2013 to August 2017. The target population was all 10 listed manufacturing firms in Kenya. The study used the census as data sampling technique. Census is normally considered as a complete count. Tables and figures were used for data presentation. The share prices of the listed manufacturing companies were obtained from NSE and a monthly average of eight listed manufacturing firms was obtained which was used as an index. Crude oil prices, LPG and diesel prices were obtained from E.I.A. All the prices were in Kenya shillings. The study used a vector autoregression model to establish the relationship between oil prices; LPG and diesel with the share prices index of the listed manufacturing firms in Kenya. VAR model is normally used when time series data are not stationary and not co-integrated. This study found out that crude oil prices have a short run positive relationship with the share prices of the listed manufacturing firms in Kenya. Diesel prices have a short run negative relationship with the share prices index of the listed manufacturing firms in Kenya while LPG prices have a significant short-run positive relationship with the share prices index of listed manufacturing firms in Kenya. Further, the study used impulse response functions and variance decomposition to evaluate the impact of LPG and diesel shocks on the share prices index of the listed manufacturing firms in Kenya. The results from impulse response function and variance decomposition supported the vector autoregression results. The study concludes that Crude oil and LPG prices have a positive relationship and a positive effect on the share prices index of the listed manufacturing firms. Diesel on the other has a negative relationship and a negative effect on the share prices index of the listed manufacturing firms in Kenya. Based on the results obtained from this study, further research should be carried out to incorporate more periods. Also, to get a vivid picture of how oil prices affect financial performance directly, the relationship between oil prices and the profitability of manufacturing firms should be looked at. Finally, this study recommends that further studies should be carried out on the relationship between oil prices and other sectors.