Do changes in interest rate regulation affect stock returns? An event study approach on the Kenyan banking sector stocks

Jane Ngaruiya, David M. Mathuva and Pat Obi

Journal of Financial Regulation and Compliance, 2025, vol. 33, issue 4, 494-518

Abstract: PurposeThis study aims to examine whether interest rate regulations affect stock returns in a developing market.Design/methodology/approachThis study analyses the impact of interest rate regulation on Kenyan banks using the event methodology and a difference-in-difference approach. It examines the market reaction and bank valuation effects from 2004 to 2022, focusing on the rate cap’s introduction in August 2016 and its repeal in November 2019. Cumulative abnormal returns are calculated for four sub-periods within a five-day window around these events using data from 11 banks and 300 days.FindingsContrary to expectations, this study finds that the announcement of interest rate controls results in negative and statistically significant cumulative abnormal returns. However, the difference-in-differences analysis shows that these regulatory changes had an insignificant long-term impact on market valuations beyond the event period.Research limitations/implicationsThis study shows how interest rate regulations affect stock returns, guiding investors in managing wealth and market efficiency in developing economies.Originality/valueThis study investigates market reactions and bank valuations in response to interest rate regulations within a developing economy. It focuses on the introduction of rate caps, their subsequent repeals and a shift to risk-based lending. Using a combination of event study methodology and difference-in-difference analysis offers a novel methodological contribution compared to prior research.

Keywords: Event study; Stock market reaction; Interest rate regulation; Abnormal returns; Difference-in-difference; Tobin’s Q (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-08-2024-0168

DOI: 10.1108/JFRC-08-2024-0168

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