The Impact of Ethiopian Banks’ Investment Strategies on Stock Market Liquidity: An Analysis of Institutional Behavior & Market Dynamics.
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Date
2025-04
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Addis Ababa University
Abstract
This study investigates the impact of Ethiopian banking investment strategies on stock market liquidity, with a focus on institutional behavior and evolving market dynamics. Given Ethiopia’s current efforts to establish a formal stock exchange, the role of banks—as key institutional investors—is particularly relevant to understanding market liquidity. Grounded in Market Microstructure Theory, Liquidity Preference Theory, and Behavioral Finance, the research explores how factors such as the regulatory environment, macroeconomic context, market infrastructure, and risk appetite influence banking investment behavior. The research employs a quantitative design, using secondary data collected from annual reports and regulatory filings submitted to the National Bank of Ethiopia (NBE). The sample includes seven major private commercial banks (e.g., Dashen, Awash, Abyssinia), selected using random sampling to ensure representativeness and minimize bias. Key financial indicators used in the analysis are Return on Assets (ROA), Debt-to-Equity Ratio (D/E), and Free Cash Flow (FCF) as independent variables, with Dividend Payout Ratio (DPR) representing stock market liquidity as the dependent variable. Descriptive statistics and regression analysis were employed as the main tools of analysis. The findings reveal significant variation in banks’ investment and dividend behaviors, influenced by risk tolerance, regulatory pressures, and profitability levels. These results validate the hypothesis that strategic financial decisions by Ethiopian banks have a significant effect on stock market liquidity. This study contributes to the limited empirical literature on emerging markets and provides actionable insights for investors, regulators, and policymakers aiming to foster a more liquid, transparent, and efficient stock market in Ethiopia.
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Keywords
Banking Investment Strategies, Stock Market Liquidity, Institutional Investors, Ethiopia, Market Microstructure Theory, Liquidity Preference Theory, Behavioral Finance, Financial Performance Indicators, Dividend Payout Ratio, Emerging Markets