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3.0 Chapter Three

3.1 Research Methodology

This chapter aims at explaining the methodology which has been adopted in this study. Research approaches or style have been categorized into mainly two groups, the phenomenological approach and positivist approach. The phenomenological approach studies the phenomenon through observation, no theory at outset while the positivist approach use an existing theory or develop a new theory and test its validity.

Since this study has used the existing theory on market efficiency therefore positivist approach have been adopted with this study, the rationale behind the choice of this approach is due to the nature of the study.

3.2 Research Design

Research design can be broadly classified as exploratory research and Conclusive research .This study is conclusive research design because it involves the testing of specific hypothesis and examination of relationships as well as the data analysis is quantitative and research process is formal.

3.3 Data types and sources

Two types of data that has been used in this study, the daily closing stock of market index(Dar es salaam Stock Exchange Index-DSEI) and the weekly share prices for a sample of five listed companies from Dar es salaam Stock Exchange. The daily closing stock for market index has covered the period from July 2007 to August 2008 making total number of observation to be 280, excluding public holidays and non trading days. The daily data prior to July 2007 were not found therefore the study had to use the available data .

The second type of data that has been used in this study are weekly share prices of the five companies/securities included in the study .The weekly data runs from Jan 2002 to August 2008, which makes the total number of observation to be between 90 and 266. The final date is the same for the all companies but the initial date differs depend on when the company joined the stock market.

The weekly data refers to the Wednesdays closing stock price, however if Wednesdays data were not available then Thursday closing price were used, in absence of Thursday data , Tuesday was taken instead, but when both Tuesday and Thursday were not available as well , the data for that week was regarded as a missing data. The use of weekly data is appropriate for this kind of studies as Humphrey and Lont (2005) asserted that 'weekly data helped to mitigate any non-trading effects and also reduced the effects of noise trading'. Even though the stock price was collected for the purpose of performing statistical tests, the actual test was conducted using natural logarithmic of the relative price. The stock return (denoted by R) was calculated by natural logarithmic difference of the weekly stock price given by the following equation

= [- )] (1)


Rt = Return at time t

P = Price at time t

The reasons why change in log price was used instead of the normal change in price, has been explain by Fama (1965), he mentioned that logarithms neutralize price level effects as well as producing a series of continuously compounded returns.

The daily closing stock for market index (DSEI) was used in performing the parametric serial correlation test and the weekly share prices for five listed companies was used to perform the non parametric runs test .In additional to the primary data (Stock prices) collected from Dar es salaam Stock Exchange, the study has also used the secondary source of data. The secondary data includes academic books, journals and other publications.

3.3.1 Thin Trading

As discussed earlier in literature review section, infrequency trading or thin trading is big problem in most of emerging stock market and failure to take into account can results into serious biasness of statistical results. In this study this problem has been taken into account and the weekly data were collected from infrequency trading.

The first step taken in controlling the infrequency trading was to eliminate the mostly thin traded securities / companies as Shanken (1987) depicted that some of researchers controls the thin trading problem by eliminating some of thin traded stocks. Initially the study was meant to include all ten companies listed in Dar es salaam Stock Exchange, however five companies were found to be very much affected by infrequency trading therefore were eliminated from the study.

The actual correction of weekly data from thin trading for the five companies included in this study was based on approach by Atchison et al (1987) as adjusted by Milambo et al (2003;cited in Mabhunu 2004). They suggested correcting thin trading problem by adjusting approach by Atchison at el (1987) who used uniform process which allocates returns equally over the days in multi -days interval where security not traded.

According to Mlambo et al (2003 ;cited in Mabhunu 2004), if a stock is not traded for example after 14 days of non trading, then a single entry given by the following equation


should be used as an oppose to 15 entries of equal value.


= Length of time between a trade in a period t and previous successive trade

= Price of stock at time t

= Dividend at time t

Therefore the infrequency problem in this study have been controlled by applying equation 2 without taking into account the dividend adjustment as it has been suggested that adjustments of dividend does not have much effects.Also the use of weekly data instead of daily data for individual companies has helped to control this problem.

3.3.1 Test of goodness -of-fit

One of the hypothesis in which the random walk has based on is about price changes to conform to some probability distribution. Therefore in testing the efficiency of stock market it is essential to identify the pattern and determine which known statistical distribution the pattern follows. In this study the Jarque-Bera test has beeen employed to test the normality of the stock return. This techniques has been used in several studies, includes the recent study of Market Return and Weak Form Efficiency: The case of Ghana by Frimpong and Oteng (2007). The Jarque-Bera test statistic is given by

JB = T(+ ) (3)


JB = Test Statistic

T = Number of observation

S = Sample Skewness

K = Sample Kurtosis.

Kurtosis which denoted by (K) in equation (3) measures the sharpness / peakness or flatness of the distribution of a series and is given by the following equation

K = (4)

A normal distributed series has kurtosis of 3, therefore whenever kurtosis of a series exceeds 3, the distribution of that series is regarded as leptokurtic relative to normal and if the kurtosis is less than 3, then the distribution is regarded as platykurtic(flat) relative to normal.

The skewness which denoted by (S) and computed by the following equation

S = (5)

Measures the asymmetric distribution of the series from its mean. A normal distributed series has skewness of zero, therefore if the skewness of the series is positive then the series is concluded to have a heavier right tail and if the skewness is negative the distribution is regarded as having a heavier left tail relative to normal.

The results of the Jarque-Bera test together with the skewness and kurtosis of the return series employed in this study have been reported in table 1.

3.4 Methods employed

As mentioned earlier this study aimed at achieving three main objectives, first to find empirical evidence of weak form efficiency hypothesis for Dar es Salaam Stock Exchange, secondly to identify the main barriers for the development of the Dar es salaam Stock Exchange i.e. the factors that hampers the growth of DSE and lastly to identify the quality of information available to investors at Dar es salaam Stock Exchange. Therefore in this chapter the methods used in achieving each objective have been explained in detail, starting with the first objective.

3.4.1 Objective 1: Empirical evidence for weak form efficiency hypothesis.

In achieving the first objective, the study intended to answer the following two specific questions

Is the Dar es Salaam Stock Exchange weak-form efficient?

Do the stock prices in Dar es Salaam Stock Exchange follow the random walk?

The study was guided by the following hypothesis

Dar es salaam Stock Exchange is weak form market efficient.

Stock price follows a random walk

Various techniques have been used so far in testing for weak form hypothesis by different researcher as depicted in literature review section, the techniques includes the statistical test of independence and trading rules.

In determining whether a stock market is a weak form or not using statistical test, the correlation / relationship between stock price and return over the successive time interval is identified. If no significant correlation found then the market is regarded as weak form market as past return can not be used to determine future return. The market will be regarded as weak form inefficient if significant correlation will be found.

In testing our first null hypothesis, one statistical test of independence have been employed, the serial correlation test . The non parametric runs test was employed to test our second null hypothesis, the random walk hypothesis. The following is the explanation of each statistical test employed in this study.

Serial correlation test

It is among the widely used test of independence .The serial correlation test measures the correlation of a variable over consecutive time interval e.g. at time t and time t-1.The reasons why this approach have been chosen to be used in this study is because of its familiarity in this kind of study. Several studies have employed this technique for example Vaidyanathan (1994) in the study of efficiency of the Indian capital market employed this approach. Similarly, Baral and Shrestha (2006) studying the daily stock behavior of commercial banks in Nepal, used the same approach.

In testing the weak form efficiency of the stock market using this approach, the correlation of log price/return series is determined, if autocorrelation is found the assumptions will be that the series does not follow the random walk, meaning that the stock price are not independent, past return can be used to determine the future return and hence the market is weak form inefficient.

The test statistic for the serial correlation coefficient for lag p can be express as

p = (5)

Similarly written as

P = (6)

In determining the autocorrelation of the return in this study, the Ljung-Box test was used. This is a portmanteau test which measures the autocorrelation of the variable. The Ljung-Box test statistic is given by

=T(T+2) (7)

Where by:

= Test Statistic

T = Number of observations

= Is the jth autocorrelation or autocorrelation coefficient (for lag j)

K = Number of coefficients to test autocorrelation, in other words the number of lag to be Tested.

Given the value of obtained from the test, the conclusion on the randomness of the log price/return can be reached if > , K at significance level α, where by , K means the α-quantile of the Chi-square distribution with K degrees of freedom. Alternatively if the p-value obtained from the statistical test is less than 0.05,then the test is significant at 95% level of confidence and therefore the null hypothesis of zero auto correction can be rejected. The results for this test have been reported in figure 1in the next chapter.

Runs test

This is the second test that had been employed in this study to test for the second null hypothesis. Unlike parametric tests such as serial correlation, a runs test is a non-parametric test which means that it does not require the normal distribution of the series. This is one of the advantage of using this approach and it is also the reason why this technique has been adopted in our study. A run can be define as a 'set of identical (or related) symbols contained between two different symbols or no symbol (such as at the beginning or end of the sequence)'Spiegel et al (2000.p366).

In performing this test, each change in return/price is classified as positive (+), negative (-) and zero change (0). Alternatively change in return could be classified alphabetically for example A ,could be each return that equal or exceeds the mean value and B could be each return that are below mean value. The test can be executed to obtained the actual number of runs (denoted by V), and then the actual number of runs (V) can be compared with the expected number of runs () which is given by the following equation

= (8)


= Expected number of runs

N = Total number of return observations

= Sample size of each category of price change

If actual number of runs will be greater than expected runs, it will be indications of negative serial correlation and if actual runs fall below expected return it will indicate the positive serial correlation of the return. Alternatively the p-value obtained can be used to conclude on the results of this test, if p-value is less than 0.05, then the test is significant at 95% level of confidence and therefore the null hypothesis of randomness can be rejected.

For a large sample i.e (N>30), the sampling distribution of V is approximately corresponds to a normal distribution and thus

Z = (9)


Z = Z-Test Statistic

V = Actual return

= Expected return

= Standard deviation given by the following equation

= [{+ N (N+1)} - 2N - (10)

Therefore at appropriate level of significance, the Z-statistic can be used to test for independence of return series.

The reason why the randomness tests such as non parametric runs test are used to test for the efficiency of the stock market is because efficiency of the stock market is determined by the way information are incorporated in current stock price. For a well efficient market , new information is incorporated instantaneously and spontaneously and therefore no arbitrage opportunity can exist.

Since new information is incorporated instantaneously and spontaneously in current stock price then stock price/returns will be generated in random fashion i.e there will be no any pattern. In relation to the weak form efficient market all past information is expected to be incorporated in current stock price in such a way that a positive change in returns is not expected to be followed by positive change in return or negative to be followed by negative as the returns generated randomly. However, for the weak inefficient market all past information are not incorporated instantaneously and spontaneously as the results the change in returns is generated in a pattern which can lead to opportunity of making fortune.

Therefore testing of randomness helps to reveal the how new information is incorporated in current stock price and the way returns are generated, if its in a random fashion or with pattern. This helps in drawing conclusion regarding the efficiency of a stock market. The results for this non parametric runs test are shown in table 2 & 3 and discussed in the next chapter.

Objective 2:Factors affecting the growth/ development of Dar es salaam

Stock Exchange

Despite aim of finding empirical evidence of weak form hypothesis, also the second objective of this study was to identify and discuss major factors/ challenges that have been affecting the development and progress of Dar es Salaam Stock Exchange.

April 2008, the Dar es Salaam Stock Exchange celebrated its tenth years anniversary, however for the period of its ten years of operations; we have witness the slow growth / development of the stock market, only few companies have been listed so far. But what are the main causes of this slow growth? in terms of listing of companies?, what are the challenges faced by the stock market?.

Further more the numbers of individuals participating in the market as investors is not so impressive, in a speech by the minister of finance and economic affairs on 10th anniversary of DSE , he said the market so far DSE has enable more than 116,651 Tanzanians to own shares. This is small figure to be as a minimum figure for the country with population of approximately 39.4 million people, we would expect a good number of individual to be aware of operations of the stock market and hence participating and a minimum figure could have been a million and above, however the situation is different then what is the real problem?, are there any efforts by the market authority to ensure the general public is aware of the stock market operations and hence increase the number of investors in the market?.

Despite of the barriers and challenges for its growth, what measures have been and will be taken to ensure the stock market is growing? .What are the future prospects of the market? . In achieving our second objective the above mentioned questions will be addressed and discussed. This was done through reviewing and studying of the existing literature and publications regarding Dar es Salaam Stock Exchange and African stock markets in general, since most of the emerging African stock markets share the same kind of the obstacle/ challenges. The findings and discussion of these issues have been presented the following chapter.

Objective 3: The quality of information to investor and other stakeholders at DSE.

The last objective was to determine the quality of information available to investors and other stakeholders at Dar es Salaam Stock Market. There various sources of information for investors in any stock market and one of the sources is financial statements. Even though financial statements are sometimes subjective to the manipulation of management and by the time financial statements are published some changes might have already happen, yet financial statements remains to be crucial source of information for investors and analysts.

Normally the existing investors as well as potential investors would like to know how the investment have been well managed as this will give them the overall picture on how safe investing in the company has been or will be. Using the published financial statements, investors and analysts can acquire valuable information which can help in their decision making.

However, investors will be deprived from using this type of source of information, if the information provided with the financial statements are not of good quality and required standard. According to Benston (2003), if the information provided by financial statements is not useful and accurate then its reception will not give investors the kind of insight they wanted and as the results investors will incur costs to find information somewhere else.

Therefore with this objective, the quality of information available to investors in DSE was determined and discussed. This was achieved through a comparison of financial statement of Tanzania Breweries Limited (TBL)- a company listed in Dar es salaam Stock Exchange and Sanisbury PLC - a company listed in London Stock Exchange.

The aim of the comparison was to determine if an investor in DSE using financial statement will get the same quality of information similar to an investor in London Stock Exchange. In this comparison in additional of looking the contents and standards in which these annual report have been prepared also the study looked at the general accessibility of the annual report and other company's information which might be helpful to investors between these company .Also the general overview of corporate governance between these two companies was analyzed and discussed. The results and discussions of this comparison have been presented in the following chapter.

3.5 Data Analysis

Since the study had involve the statistical tests, therefore data was analyzed with the help of statistical packages. The parametric serial correction test and parametric runs test was performed using SPSS (Statistical Package For Social Science) and the Jarque -Bera test was performed using EVIEWS .Both quantitative and qualitative approach have been used in interpreting the results of analysis

4.0 Chapter Four: Data Analysis, Presentation & Discussion of Findings

4.1 Introduction

The aim of this chapter is to present the analysis and discuss the findings of the study. The chapter have been divided in three main part (A, B, C). The first part (A), reports the results and the discussions from statistical tests relating to the first objective of this study. Part B and C report the findings and discussions relating to the second and third objectives respectively .

4.2 Part A : Empirical evidence for weak form efficiency hypothesis

In finding the empirical evidence for weak form efficiency hypothesis in Dar es salaam Stock Exchange ,three main statistical tests were performed , firstly the normality test i.e the Jarque - Bera test, parametric serial correlation test and non parametric runs test, the findings of these test are presented in that order.

4.2.1 Test of goodness - of- fit

Since it is essential to determine the probability distribution of the series when performing efficiency tests /statistical tests, therefore the returns for the stock market index(DSEI) as well as the returns for the five companies used in the study were firstly analyzed to determine if the return series follows the normal distribution. The result of nomality test are shown in table 1

Table 1: Jarque- Bera Test



































Std. Dev.










































Sum Sq. Dev.














Source : Analyzed data

As shown in the table 1, the p-value of the jarque -bera test for stock market index series(DSEI) and the p-value for the five individual companies is below 0.05 i.e p-value < 0.05 .This implies that the test is significant at 95% confidence level and therefore the null hypothesis of normality distribution of the returns series is rejected for the both market index and individual companies.

As depicted in the table 1 above, the return for the market index(DSEI), TCC Ltd and DAHACO/SWISSPORT Ltd are negatively skew(heavier left tail) as their skewness less than zero. I,e skewness < 0. The skewness of TBL Ltd, Simba Ltd and Twiga Ltd are greater than zero( skewness > 0) which means that their returns are positively skew( a heavier right tail) relative to normal. A perfectly symmetrical distribution such as normal distribution has skewness which equal to zero.

Regarding the kurtosis which describe the flatness or peaknedness of the distribution the results shows that the returns of both market index and individual companies have kurtosis greater than three i.e kurtosis > 3, which implies that the distribution of the returns are sharply peaked (leptokurtic) relative to normal. The p-value from test statistic, kurtosis and skewness indicates the rejection of normality for the returns so the general conclusion which can be drawn from the test of goodness-of-fit is that the returns employed in this study are not normally distributed and therefore non parametric statistical tests are more appropriate to be used than parametric statistical tests.

4.2.2 Results of Serial Correlations/ Autocorrelation Test

Though it has been suggested that when the series is not normally distributed then non parametric tests would be more appropriate to be employed, the decision to include parametric serial correlation test in this study was taken based on the argument and justification put forward by Mlambo et al (2003: cited in Mabhum 2004), they asserted that serial parametric tests ' help in detecting the presence of higher order serial correlation which is difficult to detect by merely using the runs test'.

Based on this justification they perform serial correlation test despite the fact that the normality hypothesis was rejected. Similarly ,based on the same justification the serial correlation test have been employed in this study as one of the statistical tests to test for the efficiency in Dar es salaam Stock Exchange. Furthermore several studies have been conducted using serial correlation test despite the fact that the null hypothesis of normality was rejected for the returns series employed. For example Poshakwale(1996) and Mobarek (2000) used autocorrelation test despite the rejection of normality.The results for the autocorrelation test performed at 16 lags are shown in figure 1.

Plot Symbols: Autocorrelations * Two Standard Error Limits .

Total cases: 280 Computable first lags after differencing: 278

The Q static (Box - Ljung statistic), test the null hypothesis that the autocorrelation observed up to and including each lag is zero. As indicated in figure 1, the p-value observed are mostly below 0.05 which means the test is significant at 95% level of confidence and therefore the null hypothesis of autocorrelation is zero at all lags can be rejected. This test was performed in response to the first hypothesis of the study and to answer our first research question which was asking if Dar es salaam Stock exchange is a weak form efficient market .

Based on the findings from this test it can be concluded that the returns of the stock market index(DSEI) for this particular period shows significant autocorrelation and therefore Dar es salaam Stock Exchange is weak form inefficient market. This findings are similar to the findings by Hassan et al (2003) in a study of stock market efficiency in the Gulf cooperation council countries (GCC); the case of Kuwait Stock Exchange using serial correlation method and linear model approach concluded that Kuwait Stock Exchange was weak form inefficient at that particular time. Similary, Poshakwale (1994) studying weak form efficiency and day of the weak effect in the Indian stock market , reported the violation of weak form efficiency in Bombay Stock Exchange and therefore concluded that the market is weak form inefficiency in that particular period of time..

4.2.3 Runs Test

The results for the runs test are presented in table 2 and table 3. The table two Shows the results of runs test for observe weekly data(before correcting for infrequent trading)

Table 2: Runs Test: (Observed Data).






Test Value






Cases < Test Value






Cases >= Test Value






Total Cases






Number of Runs












Asymp. Sig. (2-tailed)






Source: Analyzed data

As shown in table 2 , the p-values for the two companies, Simba Ltd and Twiga Ltd are below 0.05, implying that at 95% level of confidence , the statistical test for the return of these two companies are significant and therefore the null hypothesis of randomness measured by runs test can be rejected. For the remaining three companies; TBL Ltd, TCC Ltd and Dahaco/Swissport Ltd the null hypotheses of randomness could not be rejected as the statistical test was not significant at 95% level of confidence , since the p-values of these three companies are above 0.05.

However, after taking into consideration the thin trading problem and correct data for infrequency trading, the results in table.... Shows that for the all five companies in this study, the test is statistical significant at 95% level of confidence as their p-values are below 0.05 and therefore the null hypothesis of randomness can be rejected.

This implies that the change in return for both five companies do not generated randomly i.e there is correlation between today's return and yesterday's return, in other words the future return / stock price for these companies can be predicted. In efficiency terms we could say that past information is not instantaneously and spontaneously included in current stock price. The results for the runs test corresponds to the results obtained earlier in autocorrelation test using market index return (DSEI) regarding the efficiency in Dar es salaam Stock Exchange.

Table 3 : Runs Test (Corrected weekly data)






Test Value






Cases < Test Value






Cases >= Test Value






Total Cases






Number of Runs












Asymp. Sig. (2-tailed)






Source: Analyzed data

The non parametric runs test was performed in order to answer the second research question and in responds to the second null hypothesis which was about the randomly walk of the stock prices. Therefore based on the results from runs test after adjusting data from infrequency trading the answer for the second research question is that stock prices in DSE do not follow the random walk and hence the second null hypothesis of the study has been rejected on basis of this test and can be concluded that since stock prices/ returns are not generated randomly therefore DSE is weak form inefficient.

The findings of this runs test are consistent with the findings by Mobarek (2000) studying weak form efficiency of Dhaka Stock Market using runs test together with other tests concluded that the price stock in Dhaka Stock Market did not follow the random walk i.e the market was weak form inefficient. Also Wheeler et al (2002) using runs test and autocorrelation test studying the efficiency of the Warsaw Stock Exchange concluded that during the period of one to three day sessions of trading per week the market was weak form inefficient

4.3 Part B : Factors affecting the development of Dar es salaam Stock Exchange

The Second objective of this study was aiming at identifying and discussing various factors affecting the development/ growth of Dar es salaam Stock Exchange. But before discussing the major factors affecting DSE, it is useful first to discuss some general factors hampering the development of all African emerging markets. This is due to the fact that most of the African stock markets faces the same kinds of challenges.

In determining the growth of the stock market among the indicators used are Market capitalization, number of listed companies and market liquidity. The statistics shows that though the market capitalization for the emerging market has been increasing, however comparing with the market capitalization of the developed market, the emerging markets are still behind. The emerging markets occupy only 28.3% of the world market capitalization while the developed markets has the remaining 71.7% of the total world market capitalization (Global Stock Markets Fact book 2008).

Looking at the performance of emerging markets alone, the statistics as depicted in the table 3,show the Asian emerging markets are performing better than most of the African stock markets in term of market capitalization. It is clear that the growth rate between African emerging markets and other emerging markets such as Asia does not match. In most of African Stock markets the growth rate has been low as Parkinson and Waweru (2008) asserted that 'stock exchange in Africa appear to have missed out on many opportunities seized elsewhere. Although there long history of stock exchange in Africa, some going as far back as colonial times, their growth rates have generally been slow or even stagnant, and their role in capital mobilatization appears in many cases to have been negligible'.

Table 3: Market capitalization for Asia & Africa at the end of 2007

Number of Stock

Market Capitalization(US$million)















South Africa












Source: Extracted from Global Stock Markets Fact book (2008).

The big question is on the major impediments account for the slow growth rate or development of African stock markets. Despite the fact that there are no numerous literatures in regards to emerging African stock markets, however, several studies have been conducted in effort of identifying the major challenges for the developments of African stock markets. For example Benimadhu(2003), identify the factors affecting the development of African markets and categorized them into two groups, the political and macro-economic set up which includes issues such as political instability and internal strife, macroeconomic uncertainties and high volatility in GDP .The second group is the stock market specific factors which includes issues such as availability of market information, liquidity, corporate governance, practices of listed companies ,settlement infrastructure and manual trading.

Mensah(2003) described some of the challenges for development of African capital market and said ' in additional to small size of the market African capital markets face some well- known shorticomings; limited listing and illiquidity,low investor confidence, gaps and insufficiencies of legal framework and unsupportive macroeconomic policies.

Since the objective of the study is to identify the factors behind the slow growth rate of Dar es salaam Stock Exchange, therefore the discussion has focus more on stock market specific factors. However, firstly the macroeconomic setting and political stability have be discussed in determining how it affects the growth of the stock markets in Africa.

Political and Macroeconomic stability

Internal conflicts and political instability are very common in most of African countries. This has been one of the major stumbling blocks for economic development for this continent. Stock markets in Africa have been affected with this kind of internal conflicts and political instability. For the stock market to develop / grow more company are required to be listed as well as strong investor base must exists, but which company foreign or domestic will dare to invest in a torn apart country?, will the investors be willing to invest in such uncertainty environment?, it is clear that the internal conflicts will definitely affect the willingness to invest by the individual investors as well as companies.

In additional to political instability, most of African countries are affected by macroeconomic instability and this directly affect the performance of the stock markets in Africa as Garcia(1999) asserted that ' general macroeconomic stability may well be an important factor for development of the stock markets'.

Macroeconomic stability can be indicated by inflation rate, the income level (real income), saving rate etc. The real income of the majority of the people in African countries deprived them from participating as investors in financial markets as living expenses increase day by day, saving and investing become difficult and a big problem for the majority.

Yartey and Komla (2007) studying the development of stock market in sub-saharan Africa said 'A stable macroeconomic environment is crucial for the development of the stock market. Macroeconomic volatility worsens the problem of information asymmetries and becomes a source of vulnerable to the financial system'. In general macroeconomic instability has great impact on the development of African stock markets , since it cause the investing to become more risky and difficult.

Though these problems have existed for many years in this continent, yet much can and should be done to improve he situation. A true democracy should be practiced in Africa in order to reduce and eventually remove all repeated internal conflicts. Good governance, transparency and the rule of law must exists in African politics to bring political stability in the continent.

Macroeconomic instability can be also improved as Africa has all the resources it requires for its development, but the biggest challenge and problem is corruption and good management of the resources. There are so many examples of African leaders who misused the resource of their countries by steeling and keeping the monies in western banks, which otherwise could be used for the economic development of the country. To solve this problem the emphases should be on good governance of the country's resources and the rule of law. When macroeconomic environment and political situation become stable, will results into making a good platform for the stock markets development.

After discussing the macroeconomic and political setting, as the general factors affecting the development of African stock markets now lets discuss some of the major stock market specific factors which have been the biggest challenges for most of the African stock markets.


Regarding the stock markets specific factors,low liquidity is regarded as major barrier for the development of the stock market. Even though the statistics shows that the number of listed companies in most of African stock markets have increased yet still the size is small compared to stock markets in other emerging markets. Cohn(2000) argued that ' the lack of significant number of listed companies is a major cause of the paucity of daily trading and concomitant lack of liquidity with the stock'.In additional to small number of the listed companies, in most African stock market only few stock are actively traded and hence few stock influence the market capitalization.

According to Atta(2007) ' liquidity remains a big risk in Africa due to small floats and the small size of many listed equities'. Therefore In order to deal with this problem, more companies must to be listed and become more actively in trading, this will be achieved through setting conducive environment in terms of legal frame work and policies which will encourage more companies to be listed. Additionally general public must be educated enough regarding the activities of the stock market as the knowledge on trading will encourage them to invest and make the market more active.

Manual trading and Poor infrastructure

Manual trading and poor infrastructure has been another bottleneck for many years, holding back the growth of African stock markets. The infrastructure for information, communication technology (ICT) is very poor and therefore many stock markets in Africa have not take advantage of having ICT and exploit it for the development of the stock market.

Most of African stock markets have been manually operated, though effort are being done for the markets to become electronic operated, but till now some of the African Stock Markets are manually traded/ operated. To ensure smooth growth of the stock market in Africa, more effort should be done to transform all manually operated markets to become electronic operated markets as this will increase the efficiency of the market and takes the market further steps forward.

Public awareness and availability of information

This is another draw back for development of many African stock market. The general public in many African countries is not full aware on stock markets operations. Kibuthu(2005) studying the capital markets in emerging economies, in additional to liquidity found public awareness among the factors affecting the Nairobi Stock Exchange. Similarly Osei( 1998), studying factors affecting the development of an emerging capital market ; the case of Ghana found lack of awareness, lack of effective education as among the major challenges for the development of Ghana Stock Exchange.

Most of African stock market have shown some effort in creating public awareness regarding the operations of the market, however the effort done are not enough to create great impact to the general public, more measure must be taken. There must be a proper system of educating the general public about the activity of the market for example the information or education on stock market could have been designed in such a way that its start with beginners level , for those people with no previous knowledge on stock market operations , to the advance level for the people with some knowledge on stock market.

In additional to public awareness problem, generally the availability of information and information access is big problem in most of African countries. Recording is very poor and furthermore the accessibility of the available information at a times is very difficult, there strong beuarecracy is access the information even for the type of information which in normal circumstances should have been freely available to the public. It is surprising to find out that some of the listed companies in African stock market do not have even a company website to inform the public on its activities and progress.

Public awareness on stock market activities and information access are very crucial in stock market development as Zervos and Levina(1996) mentioned that ' easy access to information about listed firms by the domestic and foreign investors is positively associated with stock market development'. This implies that for the steady growth of African stock markets, more effort should be done to create public awareness about stock markets operations through proper education system. Also the availability of information and its accessibility should not be difficult, this can be achieved through proper record keeping with help of modern technology and easy access of the information to the public.

In additional to the previously discussed factors, also other factors have been mentioned as among the challenges for the development of emerging African stock markets these includes, accounting requirements, corporate governance of listed firms. Yartey(2008) studying the determinant of stock market development in emerging economies, apart from liquidity and macroeconomic stability also banking sector development, domestic and real income were found to be highly correlated with the size of the stock market i.e development of the stock market.In another study Pardy and Dong (1993) found correlation between financial depth and stock market development for the period between 1984-90 for 32 countries. Similary ,Kunt and Levina(1993) in a prerilemenary study found the complementary relationship between development of stock market and financial intermediaries . This implies that a good financial system can properly the growth of stock while bad or poor financial system can humper its development.

The Dar es salaam Stock Exchange

Having discussed the major and common challenges for the development of African stock markets, now lets focus into stock market specific factors which have been affecting the development of Dar es salaam Stock Exchange. However , before discussing the specific factors, lets discuss on the macroeconomic and political setting and identify if they have been a major challenge for the progress of the market.

Macroeconomic instability has been among of the major factor affecting the growth of Dar es laam Stock Exchange. Lack of capital in the country and poverty among the society prohibits most of poor Tanzanians to participate in the financial system. The statistics shows that between 2000- 2006, 36% of Tanzanians population where living below national poverty line (World bank 2008). With such low income and expensive living expenditures it became very difficult for most of people to participate in financial system either by saving or investing.

The macroeconomic environment in Tanzania could be improved dramatically since Tanzania has all the resources needed for its development such as mines, gases and oil. Other sector of economy such as agriculture and tourism have not been exploited enough for the benefit of the society. For example Tanzania is the only country in the world in which the gem stone called 'Tanzanite' can be found however, the country has not benefited for being the only producer and generally the ordinary Tanzanian has not benefited with the mine sector.

Similar to other African countries , the big problem is corruption and lack of good governance of the people entrusted with the public to manage the national resources on behalf the society. The economic improvement of the country could have boost the development of DSE as the majority of Tanzanians could have better life and good income which means , they would be able to participate in financial system and hence became stakeholder in DSE.

Regarding the political instability and internal conflicts, these has not been draw back for the progress of DSE because since the independence of Tanganyika and the union with Zanzibar to form republic of Tanzania, the country has been peaceful and calm. The only problem has been the economic development of the country, which could have been improved dramatically through good governance and accountability.

Among the stock market specific factors , accounting requirements, lack of information or awareness on the stock market operation, liquidity, manual trading and cost of listing have been mentioned as a major challenges for the development of the Dar es salam Stock Exchange. McGregor (2008),reported that in an interview with IPS this year, the Chief Officer(CEO) of DSE mentioned some of the challenges faced by DSE in its development which includes: reluctance of companies to join DES due to accounting requirements and lack of understanding and awareness regarding the operations of DES.

Accounting requirements

Accounting requirements has been a major block for more companies to be listed at DSE as many company are reluctant to join the market due to the concern of exposing their accounting books for the public scrutiny. Many private companies in Tanzania take advantage of weak laws and lack of adequate law enforcement to tinker with taxes and accounting books as the results most of these companies do not want to expose themselves for the public scrutiny after listing with DSE.

Lack of awareness and understanding on DSE operations

Similar to Kenya and Ghana, majority of Tanzanians do not understand or they are un ware about the activities of the stock market. This lack of understanding among businesses and individuals regarding the mechanics of the stock exchange has been one of the stumbling block for the progress of DSE.

For the stock market to become more active and progress it needs strong investors base and this will only be achieved through effective approach in educating and informing individuals and businesses on the benefits of becoming a stakeholder in a stock market. The effort done by authority at Dar es salaam Stock Exchange has not been good enough, with the involvements of other stakeholders such as education institution, media houses and government, the DSE could have achieve better result than now. For example DSE authority could have taken opportunity for public lecturers conducted in various universities in the countries to create awareness on its operation as well as producing potential investors and stakeholders of DSE.


This is a major problem and challenge for the growth of Dar es salaam Stock Exchange. DSE is one of the tiny stock market in Africa. Though it started its operation in 1998, still the number of company listed is too small. The growth in terms of number of listed companies has been very slow and in additional to small size of the markets ,only few stocks are actively traded. The data shows that till march 2007 out of ten companies listed ,three companies contribute third of the total market capitalization(Dar es salaam Stock Exchange 2002). This signifies that only few companies are active in trading and hence holding back the progress of the DSE.

Manual Trading

Similar to other African stock markets, the Dar es salaam Stock Exchange started its operation using traditional manual trading. It operated in this manner for nine years till 2007 when the market became electronic. Therefore during that period the horizon and operation of DSE was limited as well as its development due to this type of trading. It is expected that by changing from manual trading to electronic, the activities and operations of DSE will be improved and therefore some progress will be seen in near future.

Initial Cost

It has been also noted that initial costs to prepare the company's legal affairs as well as balance sheets has been one the stumbling block for companies to join the DSE. The initial costs associated with preparations to be listed in DSE has cause some of the private companies to hesitate accepting the invitation to join the market . Also in annual report of Dar es salaam Stock Exchange of 2007, it has been pointed out that financial constrain and lack of human resources are among of challenges faced by the market.

These are some of the major factors that has been affecting the smooth progress of DSE. Effort are currently underway to ensure that these obstacles are minimized, however more measure must be taken if better results are desirable. In the next chapter some of recommendation on what to be done overcome these challenges will be given and discussed.

4.4 Part C : The quality of information to investor and other stakeholders at DSE.

The aim of the third objective was to identify if the quality of information available to investors in Dar es salaam Stock Exchange is the same to investors in London Stock Exchange. This was achieved through the comparison of two annual reports, the annual report of Tanzania Breweries Company Limited- listed in DSE and the annual report of J Sainsbury - listed in LSE. The annual report for the TBL used was for the year ended 31 March 2007 and for the Jsainsbury the annual report used was for the year ended March 2008.

The quality of information is determined by several factors includes the source of information itself as well as the way data are analyzed to produce valuable information. Therefore it was essential to identify the standards in which these two annual reports were prepared. It was revealed that both annual reports were prepared by the same company -the Price Waterhouse Coopers on behalf of these companies. Both annual reports were prepared in conformity to International Financial Reporting Standard(IFRS) .In additional to these standards the annual report of TBL was prepared based on the requirements of Tanzania companies Act 2002 while the annual report of J Sainsubry was based on UK's companies Act 1985.

Despite the conformity to the international standards and companies Act for both annual reports, slightly difference in contents was identified. The annual report of Jsainsbury appeared to be more rich in contents than the annual report of TBL. For example while the annual report of TBL only mentioned about its social responsibility in educational and environments projects, the annual report of J Sainsbury reports on company's principal corporate responsibility and it also direct the reader of the report where to find the corporate social responsibility report. The annual report of J Sainsbury has reported on company's statement of governance, while much have not been reported regarding the corporate governance in TBL annual report.

This implies that if an investor in DSE wants to have more information regarding social responsibility , principal, policies and practice of corporate governance in TBL will be difficult to access this kind of information as it not openly available in its annual report. In connection to this lack of enough information ,the general accessibility of the information between these two companies were analyzed.

It was found that the accessibility of information between TBL Ltd and J Sainsbury Plc is largely different, while the annual report of J Sainsbury was accessed online through their website( http// ),the website for the TBL Ltd was traced without success as it seems currently the company do not have the website. Information on share prices, corporate responsibility, company news, announcement and corporate governance are freely available to the potential investor of JSainsbury through the website , however it appears that potential investor of TBL Ltd for this kind of information has to rely on the second hand information from other sources such as brokers as it is difficult to get hold of this kind of information directly from the company.

The website of JSainsbury comprises of investors tools which have share price charting tool, sell side analyst and further more the website contained the investor pack which give opportunity for an investor to create its own information pack and hence download information as he/she needed. This means that investors in developed stock market such London Stock Exchange are well informed and they are able to make sound decision regarding investments based on the available information.

In additional to the accessibility of information and standards in which the reports were prepared , the general issue of corporate governance was assessed. According Monks and Minow(2004p.1) ' The importance of corporate governance became dramatically clear in 2002 as series of corporate meltdowns, frauds and other catastrophes' , since then measures have been taken to ensure the good practice of corporate governance among public companies. For example in United Kingdom the listed companies in additional of other rules and regulations ,are required to practice the combine code on corporate governance. The annual report of Jsainsbury under statement of corporate governance has explain how the company applies the principles of combine code of corporate governance.

The report has described issue such as the role of the board, division of responsibility, information & development ,board evaluation, board committees, corporate responsibility committee etc. Most of African countries do not have a well coordinated codes of corporate governance practice as in UK, however listed companies are subjected to good corporate governance as stipulated by the listing requirements and company Acts. In Tanzania listed company such as TBL are required to apply the corporate governance practices as stipulated by the Capital Market and Security Authority (CMSA) as well as company Act 2002. Comparing to J Sainsbury the annual report of TBL has not explain much how it applies the good corporate governance as required by the law and governing bodies though the assumptions is that TBL do practice corporate governance required by the law since it's a listed company. However this information is not very much available to an investor in DSE as compare to an investor in LSE. For example a shareholder of J Sainsbury does not need to wait the annual report to get information on corporate governance as this information is freely and always available online.

Based on the our discussion the conclusion which can be drawn concerning the quality of information available to investors in DSE and LSE is that, if quality is defined in terms of financial and accounting standards then there should not be much difference as both annual reports are prepared based on International Financial Reporting Standards. However, big difference exists in regards to the availability of information to investors. Investors in DSE are not well informed as investors in LSE .Available information is not so rich as in LSE and its accessibility is big problem. Concerning corporate governance it is clear that most of companies in UK do practice good governance as indicated in JSainsbury's annual report , and the assumptions for companies listed in DSE is that they also do practice good corporate governance as required by the law, however to what extend is this practice remain a question, this could be good area for further research to study the extend of corporate governance practice for listed companies in Tanzania since this area of study is not well explored. In the next chapter the general conclusion for the whole study have been presented with some recommendations also possible areas for further research have been proposed.

Chapter 5: Conclusion & Recommendation

5.1 Introduction

In this chapter the conclusion drawn from the analysis of the study ,some recommendations and possible areas for further research have been presented as well as the limitations of the study. Lastly the chapter has outline some new knowledge and insight the researcher has learnt/ gain in conducting this study.

5.2 General conclusion

The main theme or central question of this study was about the efficiency of the Dar es salaam Stock Exchange .The theory on efficiency markets has outline three forms of efficiency market namely weak form , semi strong and strong form efficiency markets. Since the invention of the theory, researchers have devoted time and resources in finding the empirical evidence to support the theory.

However as mentioned earlier most of these studies have been conducted in developing markets and the perception is that emerging market such as African markets are weak form efficient or inefficient. Therefore the study was conducted in effort of finding the empirical evidence of the theory of efficiency market hypothesis and hence adding a new literature on few existing literature on African stock market.

The study was meant to answer two main research questions and testing two null hypothesis. The research questions was if Dar es salaam Stock Exchange is a weak form efficient market and the second research question was about the random walk of stock price/return. The first null hypothesis tested was 'Dar es salaam Stock Exchange is a weak form efficient market' and the second null hypothesis tested was 'stock price follows the random walk'. Three different statistical tests namely parametric serial correlation test, runs test and unit root tests were employed to test the null hypotheses and answer the research questions.

As depicted in analysis chapter, the findings from parametric serial correction test has indicated that there is significant auto correlation for the stock market index return for that particular period studied. Similarly , the result from non parametric runs test after correcting data for infrequency trading and unit root tests( ADF &PP tests) has indicated that the return of five companies/firms investigated are not generated randomly.

Therefore based on this findings from statistical tests, both first and second null hypothesis of the study was reject and the answer to the first and second research questions is that DSE in not weak form efficiency and the stock prices in the market do not follow a random walk. Therefore based on the findings it can be concluded that Dar es salaam Stock Exchange is a weak form inefficient market. These findings relates to the notion/ perception that stock markets in emerging economies are weak form inefficient.

The general implications of the findings of this study regarding the efficiency of DSE is that the technical analysis can be valuable in the market as the stock prices of the company investigated do not fully reflect available past information therefore the use of past trading information could be of value. For individual investors in DSE these findings implies that investors can trade off between passive strategy( i.e the buy and hold strategy) and active strategy. For the highly efficient stock market , investors do not have much option to choose between active and passive strategy as it is believed that the active strategy is of no value in highly efficient markets. However since the results shows that DSE if weak form inefficient market investors can opt for active strategy and make fortune.

The discussion regarding the factors affecting the development of DSE which was the second objective of the study has revealed that in additional to macroeconomic instability, other stock market specific factors which have been the major challenges for the market includes; low liquidity, lack of awareness and understanding of activities of the market, initial costs, accounting requirements, financial as well as human resources constraints and manual trading. However since 2007, manual trading was no longer a major challenge for the market as it become electronic.

Several suggestion can be offered to DSE, on how to overcome these challenges. For example in order to create more public awareness on activities of the stock market, it is recommended that proper system of educating general public should be put in place. DSE can adopt the system implemented by Ghana Stock Exchange. Ghana Stock Exchange has implemented the system of educating public on the activities of the market. Five courses are normally conducted throughout the year for the duration of 3 to 10 days. These courses cater for both professionals and non professionals. The five courses offered include; basic securities, advanced securities, securities selling and investment advice, securities trading and directors course. This system is good and proper hence its advisable other African stock markets which such as DSE which do not have proper system educating the public should implement the similar kind of programs for advancement of the markets.

Further more, other stakeholders such as higher education institutions could be involved in effort of creating general awareness to the public on investments and capital markets as this could create more desire for students to find more about the activities of DES. The subject on investments and capital markets should be introduced to all discipline of business studies in undergraduate and graduate level as currently some of higher institutions in Tanzania do not incorporate this subject in their business studies curriculum. Also investments and capital markets can be offered to students of other field of studies apart from business studies as an optional subject of study. This will help to create more awareness about investing and capital markets among students in higher learning institutions who are potential investors and stakeholders of DSE.

Since the reluctant of many private company in Tanzania to join the market has results from lack of proper law enforcement which gives the lop hole to some of these companies to play around with the accounting figures, therefore it recommended that strong measures should be taken to ensure that laws are properly enforced, which means this opportunity will no longer exists and fear of public scrutiny can be removed and hence private company can be persuaded to be listed. These are just some of the recommendations on what to be done to improve the current situation of Dar es salaam Stock Exchange.

The third and last objective of this study was regards to the quality of information available to investor in Tanzania. Annual reports as one of the available information was analyzed to determined the quality of information. This was done through the comparison analysis. Based on the comparison of annual reports of TBL Ltd and J Sainsbury plc as depicted in analysis chapter, it has been revealed that the quality in terms of standards in which these annual reports have been prepared is same, however major problems that have been pointed out are concerning with the robustness and availability of the information . Robustness and availability of information for companies listed in DSE in big problem which means investors in Tanzania are not very much benefited with the information which should have been freely and available to them.

On the other hand investors in UK taking an example of J Sainsbury plc , have much information available to them and further more the accessibility of this information is excellent as much of the information can be accessed online. This implies that effort should be done by all companies listed in DSE to ensure that their current and potential investors are well informed and accessibility of the information is excellent.

5.3 Recommendations on possible further research

There has been a mix results or findings from efficient market hypothesis studies world wide, one of the reason being due to the techniques used as well as the type of data employed. Therefore regarding the findings of this study it is recommended that further empirical evidence of weak form efficiency of DSE should be sought using different techniques such as variance ratio, mult- variance ratio tests and trading rules. Also since this study has used weekly data and daily data with few observations, therefore it is recommended that future empirical studies should be conducted using long horizon of daily data as well as incorporating monthly data in the study.

The efficiency of the stock market is not a static phenomena but it evolved hence it is recommended that in future another study should be conducted focusing the evolving of information efficiency in DSE using tests of evolving efficiency such as GARCH approach. This kind of study will help to reveal the trends of stock market towards efficiency.

In additional to possible further studies in efficient market hypothesis, also future research could be directed in area of corporate governance. Corporate governance is a new field of study as it has attracted more attention of researchers and academician in this last decade. This field of study has not been explored to its fullness in Tanzania, so it could be of good idea to conduct more research in this area. Among other things the research should focus on the general practice of corporate governance in Tanzania, the questions such as to what extend the companies listed in Dar es salaam Stock Exchange do practice corporate governance principles as stipulated by law and what should be done to improve corporate governance of listed companies needs to be answered through empirical studies.

5.6 Limitation of the study

Data availability and accessibility is very big problem in most of African countries including Tanzania. This has result to one of the limitation of this study as some of the data were not found. The study had to use daily market index covering period of one year only because data prior to July 2007 were traced without success. However we tried to minimize the effect of this limitation by including weekly data in the study which had longer horizon that daily data.

The efficient of stock market is not a stagnant phenomenon, since its evolved, therefore despite of the limitation of the data , it was good idea to conduct this study to determine the efficient of DSE in that particular period. Furthermore , according to the knowledge of the researcher there is no any study of this kind which have been conducted in Tanzania so this study is considered as a pioneer study of efficient market hypothesis in Tanzania, therefore it was worth to conduct this study to build foundation for other future study of this nature.

Time constrain was another limitation of the study, the time available to finish the whole project was very limited especially with this kind of studies which incorporate the application of the knowledge from other fields of study apart from business studies(MBA). For example the knowledge on econometrics had to be applied in conducting this study and the time was not enough to get deeper into the subject. However effort was made and the knowledge acquired was sufficient to enable the study to be complemented with good and acceptable statistical findings.

5.5 Knowledge and insight learnt

The knowledge and new insight learnt in the course of conducting this study exceeds by far the difficulties and problems encountered. In additional of being a partial fulfillment requirement for an MBA degree, this research project has added excellent knowledge to researcher of the study which could not be easily obtained without conducting this study. This study has given researcher the opportunity to test empirically the theory on efficient market hypothesis learnt in investment classes also the knowledge on econometrics as well as broader understanding of statistics was gained in the course of conducting this project. Further more, the researcher as junior academician in one of the university in Tanzania, this study has been a great inspiration and it has given new insight regarding the areas for further studies which can be conducted in future.