International Journal of Science and Research (IJSR) ISSN (Online): 2319-7064 Index Copernicus Value (2013): 6.14 | Impact Factor (2015): 6.391 Volume 5 Issue 10, October 2016 www.ijsr.net Licensed Under Creative Commons Attribution CC BY Analysis of Interest Rate and Stock Price in Africa: Case Study of Ghanaian Listed Firms Bridget Opoku-Agyemang 1 , Grace Ofori-Abebrese 2 , Benjamin Korankye 3 1, 2 Kwame Nkrumah University of Science and Technology, Kumasi 3 University of Science and Technology of China, Chengdu (School of Political Science and Public Administration) Abstract: In this study, we investigate the impact of interest rate on stock prices in Ghana by employing OLS model with monthly data spanning from January, 2000 to September, 2010. To prove our concept, we used Granger causality to test the direction and the causality between interest rate and stock prices in the context of Ghana. The test results show that there is unidirectional causality between interest rate and stock price. This means that changes in the stock price explains the variations in the interest rate. The empirical results indicated that interest rate definitely has negative effect on stock price in Ghana. The outcome also indicated unidirectional causality between interest rate and stock price. Key words: inflation, interest rate, stock price, Ghana stock market 1. Introduction A broad consensus has emerged in recent decades emphasizing the idea that stock markets occupy a strategic position in both developing and industrialized nations; it has become a significant part of a country‟s financial system and a common feature of a modern economy (Van-Treek, 2009; Obstfeld, 1986). The prices of stock and other asset are important parts of the dynamics of economic activities and can influence social mood and a business performance. History has shown that performance of a stock market is perhaps the most potent instrument for measuring social or economic developments in any economy. Drabenstott and Meeker (1999) call it a barometer for the economy. Stock market facilitates all the key prospects of the financial system, such as capital mobilization, investment opportunities, risk distribution and exert corporate control. The Ghana Stock Market (GSE) is described as one of the emerging markets, this was established in July 1989 as a private company limited by guarantee under the Companies Code of 1963 (Act 179) and commenced trading on 12th November, 1990 to encourage private investment in Ghana. However, the status of the company was changed to a public company limited by guarantee under the Company‟s Code in April 1994. The GSE is regulated by the Securities and Exchange Commission, under the Securities Industry Law, PNDCL 333, 1993, as amended. Since its inception, the GSE's listings have been included in the main index, theGSE All-Share Index. In 1993, the GSE was the sixth best index- performing stock market, with a capital appreciation of 116%. In 1994 it was the best index-performing stock market among all emerging markets, gaining 124.3% in its index level. 1995's index growth was a disappointing 6.3%, partly because of high inflation and interest rates. Growth of the index for 1997 was 42%, and at the end of 1998 it was 868.35% per stock. As of October 2006, the market capitalization of the Ghana Stock Exchange was about 111,500 billion cedis ($11.5 billion). As of December 31, 2007, the GSE's market capitalization was 131,633.22 billion cedis. In 2007, the index appreciated by 31.84%. With a drop of 46.58% in the GSE All-Share index, the Ghana Stock Exchange ended in the year 2009 as the least performing market in Africa. In the previous year 2008, the gain in the GSE All-Share Index of 58% put Ghana ahead of all the African markets. Due to the continuous improvement at GSE, in 2010, it was adjudged the most innovative African Stock Exchange at the African Investor (Ai) prestigious annual index series awards held at the New York Stock Exchange out of seven African Stock Exchanges nominated. In the year 2009, the stock market went through a difficult situation and this was against the background of 2008 being one of the best years of the market. The trend that the market went through in 2009 resulted from the effect of the global financial crisis which began was felt in the fourth quarter of 2008 and the fact that in 2009, the Exchange also effectively began migrating from paper certification to electronic book entry securities under the new automated Trading System. That process naturally requires time since investors needed to be convinced to get on board. According to Graham and Harvey (2001), interest rate risk is perceived as the second most important risk factor, only behind market risk. Financial theory states that movements in interest rates affect both the firm‟s expectations about future corporate cash flows and the discount rate employed to value these cash flows and, hence, the value of a firm. The impact of interest rate fluctuations on the market value of companies has received a great deal of attention in literature, although much of the empirical research has focused on financial institutions because of the particularly interest rate sensitive nature of the banking business (Flannery and James, 1984; Staikouras, 2003 and 2006; Hahm, 2004). The nexus between interest rate and stock price has received attention of researchers from a wide range of areas such as assets pricing and testing stock market efficiency etc. Moreover, developing countries can utilize such an association to attract foreign portfolio investment in their own countries. In Ghana, interest rates decisions are taken by the Monetary Policy Committee of the Bank of Ghana. The official interest rate is the Monetary Policy Rate (MPR). The fundamental principle for the relationship between interest rate and stock market returns is that stock prices and interest rates are negatively correlated. This is due to the fact that Paper ID: ART20162487 DOI: 10.21275/ART20162487 1582