Uncertainties in the flow of foreign portfolio investments (FPI) result in unpredictable behaviour of stock returns in Kenya’s economy and also at the firm level. The net effect of this is the possibility of financial loss suffered by the banking and non-banking institutions. The objective of the study was to compare the effects of foreign portfolio equity on stock returns of listed banking and non- banking institutions in Kenya. The study used purposive sampling technique and concentrated on 14 banking and non-banking institutions listed on the Nairobi Securities Exchange. Secondary data was obtained from Central bank of Kenya, Nairobi securities exchange and capital markets authority for the period January 2008 to December 2014. The study used causal research design, and adopted a panel data regression using the Ordinary Least Squares (OLS) method where the data included time series and cross-sectional data that was pooled into a panel data set and estimated using panel data regression. Results from panel estimation showed that exchange rate risk had a significant negative coefficient of -0.8371 with a P- value of 0.0020 for banking institution and negative coefficient of -0.6023 with a significant P- Value of 0.0673 for non-banking institutions. The results are statistically significant at one percent level of significance and five percent level of significance for banking and non-banking institutions respectively. Inflation had significant negative coefficient of -1.7550 with a P- value of 0.0210 in relation to stock returns for banking institutions and an insignificant negative coefficient of -0.6875 with a P- value of 0.4569 for non-banking institutions. The results indicate that the stock returns of banking institutions are affected by inflation while inflation has no effect on non-banking stock returns. The study recommended that policies that would attract foreign portfolio investment should be pursued in order to enhance stock returns.
Key words: Foreign portfolio equity, banking institutions, non-banking institutions, stock returns, Nairobi securities exchange.
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