"Building Markets from Ethnically Fractionalized Networks: Recruiting New Investors into Kenya's Nairobi Stock Exchange" 2011 Building Markets from Ethnically Fractionalized Networks: Recruiting New Investors into Kenya’s Nairobi Stock Exchange 1

Despite low incomes, weak property rights, low levels of financial literacy, and an ethnically diverse population, the number of domestic investors in Kenya’s Nairobi Stock Exchange increased almost ten-fold to 1.4 million between from 2006 to 2008, with 98 % of all new investors entering the market via seven IPOs. This paper models the diffusion of the practice of shareholding through Kenyan society as a process of social contagion, with social networks based on ethnic and geographic homophily carrying information about the profitability of previous investments from current to potential investors. I study the effect of geographically clustered ethnic groups on the national-level diffusion of this new economic practice in two ways. First, I consider how local levels of ethnic homogeneity affect a node’s susceptibility to network contagion. Second, I consider how contagion flows through two separate network spaces measured by geographic and ethnic distance between existing and potential adopters of the practice. I merge investor-level data from the NSE’s electronic trading platform to national survey data to construct a unique database showing the timing of first share purchase, town of residence and profits earned on IPO investments for 83 % of all Kenyan investors as well as townlevel estimates of Kenya’s ten primary ethnic populations and a range of town-level characteristics. After controlling for IPO-specific effects and a comprehensive set of structural characteristics of each town, I find strong evidence that the positive contagion effect of profits earned by geographically proximate peers is sharply reduced in ethnically homogeneous communities and that ethnic networks operate above and beyond geographic proximity between current and potential adopters as significant transmitters of material information and therefore recruiters of new investors. The policy implications for constructing functional capital markets in developing countries are discussed

Instituting Investor Capitalism In East Africa: Adoption And Utilization Of The Practice Of Shareholding In Kenya, 2006-08

This dissertation studies the ongoing process of institutionalizing investor capitalism in Kenya's Nairobi Stock Exchange. The research is presented in three papers. The first paper studies active efforts by the state to recruit new investors through the use of mass advertising campaigns. The second paper studies investor entry into the market via a social diffusion process, where profits earned by geographically proximate and ethnically similar previous investors attract new investors. The third paper investigates how newly recruited, inexperienced investors utilize their shares after entering the market, focusing on rates of speculative trading. A unique, individuallevel dataset of investor behavior was constructed based on access to the Nairobi Stock Exchange's electronic clearing and settlement platform to which data from several national surveys was merged