The stock market is one of the most closely observed economic phenomenons in the world. Performance of a stock market is gauged on stock index, which also depends on performance of individual constituent stock. Therefore, stock inclusion in an index affects the stock, the index and the market at large. The argument that a stock’s inclusion in an index results in a share price increase was observed quite a long time ago in developed stock market index. However in frontier markets, especially Kenya, this phenomenon has not been adequately addressed. The aim of the study was to evaluate effects of inclusion in NSE 20 share index on firm’s share market performance. Specific objectives were; to determine effects of inclusion in NSE 20 share index on firm’s share return and, to establish effects of inclusion in NSE 20 share index on firm’s share market turnover. The study adopted an event study research design. Purposive sampling method was used to select only Mumias Sugar Company Ltd. for analysis from the target population of NSE 20 share index constituent companies. Secondary data from Nairobi Securities Exchange was analysis with the aid of STATA statistical package. Regression and correlation models together with parametric tests statistics (z-test) was used to analyse and test the hypothesis. Findings were presented using frequency tables, percentages, pie charts and graphs. The study found that Mumias Sugar Co. Ltd stock showed a rise in ARs towards index inclusion announcement, negative ARs towards the inclusion date and a low post inclusion ARs volatility. With stock turnover, the study found that the stock reported a drop in turnover ratio towards the announcement and inclusion dates but rose gradually after inclusion. Additionally, the stock yielded insignificant rise in share’s market price performance and significant change in market trading volume. The study concluded that index inclusion has a general positive effect on affected stock through rise in price (approximately 4.05%), insignificance rise in abnormal returns and significance increase in liquidity within the short-run period in a frontier capital market. The study recommended that stocks added to blue chips indices are viable investment options as they exhibit an above average return in the short-run. However, these returns are insignificance and thus cannot warranty speculative investment strategy when transaction cost are captured. The simple buy- and-hold strategy is the best due to exhibited upward trends in cumulative stock returns. Lastly, the study suggests further studies on effects of deletion from index on firms market share performance.

Background of the Study 
The Stock Market is one of the most closely observed economic phenomenons in the world. Market indicators meet the demand for measures of stock market performance. Such indicators quantify movements in stock market prices, and act as a standard in evaluating the returns on money invested in the stock market. Stock market indices as aggregate measure are instruments or platform to meet the information requirement of investors by characterizing the development of global markets and specified market segments or sectors (Amenc & Goltz, 2006). 

A stock index is a measure of performance of a group of stocks which may be seen as a representative of a stock market. This can be either the whole market or even a segment of the market. According to Redhead (2003), indexes vary in type from regional, industry specific, national and even global. Indexes are also calculated for various instruments such as bonds, futures, and even real estate investments, thus they can be modified to meet certain information needs. With the advent and growth of indices, there have been various products such as index funds (exchange-traded or not), options and futures which with direct links to indexes and do represent large industries of in the market and themselves (ibid). 

According to Philips and Kaplan (2005), the earliest indices were designed 'to gauge the market's general direction'. One of the first indices was the Dow Jones Industrial Average (DJIA) Index, which initially tracked 19 industry stocks. It was designed in the late 19th century by Charles Dow. It used a simple arithmetic construction which is the basis for many indexes including the Nairobi Securities Exchange (NSE) 20 share Index. As technology improved, market gauges have moved from very basic indexes to broader market measures, such as S&P 500, and higher quality measures of the full market e.g. Wilshire 5000, NSE All share Index among others. 

The inherent inability of the older index to satisfy investors has led to construction of new indices. Old indexes were good for just tracking the market and thus could not meet various demands from investors who had different investment styles and objectives such as superior portfolio return. New indexes varied from 'one-factor and two-factors models to more complex six-to-nine factors model such as Salomon Smith Barney index and Dow Jones Industries index (Philips & Kaplan, 2005). 

In addition, factors in new indexes vary from the basic price and shares sold to things like earnings per share, dividends, tax and a variety of other factors. The main aim is usually to have more than one shoe fits all indexes so that investors can be able to get a 'greater' understanding of the market. Currently a third generation of indices is being designed to create a better reflection to the underlying market mechanism. These fundamentally weighted indices are currently being put to test by various researchers. 

Stock indexes as a standard market gauge do affects stock performance. The argument that a stock’s inclusion in an index results in a share price increase was observed quite a long time ago in developed stock market index. However, this according to the postulates of Efficient Market Hypothesis (EMH) could be regarded as market anomaly. Fama (1970) observed that asset prices should incorporate all information required for their accurate pricing and therefore changes in the composition of stock market indexes should not have any significant effects on the prices and trading volumes of the affected stocks. This study shades light on this issue with regards to index inclusion in a frontier market. 
Nairobi Securities Exchange (NSE) 

The Nairobi Stock Exchange (NSE) - formerly Nairobi Stock Exchange - has a long history that can be traced to the 1920’s when it started trading in shares while Kenya was still a British colony (IFC/CBK, 1984). While share trading was initially conducted in an informal market, there was a growing desire to have a formal market that would facilitate access to long-term capital by private enterprises and allow commencement of floating of local registered Government loans (Ngugi, 2003). This led to the constitution of NSE in 1954 as a voluntary association of stockbrokers registered under the Societies Act (NSE, 1997). The newly established stock exchange was charged with the responsibility of developing the stock market and regulating trading activities. 

Since its inception, various development have been made to date such as introducing of online brokerage, accounts changing from paper based to online through introduction of the 

Central Depository System (CDS), longer trading periods between 10:00 am and 3:00 pm among others. All this has been done with the aim of enhancing exchange efficiency within the ever-growing financial sector in both pricing and trade volume as more investors and companies joining the exchange via initial public offerings. There has also been an increase of bond trading activity as companies seek to float short-term notes and debentures (NSE, 2013). Currently, Nairobi Security Exchange has 19 member firms or stockbrokers. (www.nse.co.ke). 

In July 2011, the Nairobi Stock Exchange Limited, changed its name to the Nairobi Securities Exchange Limited. The change of name reflected the strategic plan of the Nairobi Securities Exchange to evolve into a full service securities exchange that supports trading, clearing and settlement of equities, debt, derivatives and other associated instruments (NSE, 2011). The exchange currently (July 2013) has 52 listed firms drawn from all sectors of economy and classified in to market segments. According to NSE Listing Manual (2010), NSE market is divided in to the following segments; Main Investments Market Segment (MIMS), Alternative Investments Market Segment (AIMS) and Fixed Income Securities Market Segment (FISMS). 

More recently, the NSE launches the Growth Enterprise Market Segment (GEMS) on 22 January 2013 (NSE, 2013) and listed Home Afrika Limited, as the first company, on 15 July 2013 (NSE, 3013b). Requirements for listing in any market segment can be obtained from NSE Listing Manual (2010) and NSE Press Release (2013b). NSE also manages the following stock indices; NSE All share index, NSE 20 share index, FTSE NSE Kenya 15 Index, FTSE NSE Kenya 25 Index, FTSE NSE Kenya Govt. Bond Index, FTSE ASEA Pan African Index (www.nse.co.ke) 

NSE 20 Share Index, Constituents Companies and Index Reviews 
The NSE 20 Share index is a market-capitalization weighted index for the Nairobi Securities Exchange. It was established in 1966 to by Nairobi Securities Exchange Ltd (then Nairobi Stock Exchange) to reflects daily prices of the 20 blue-chips (superior profitability and dividend record) companies (NSE, 2010b). These companies are drawn from the three sectors of market namely the Main Investments Market Segment (MIMS), Alternative Investments Market Segment (AIMS) and Fixed Income Securities Market Segment (FISMS), and account for 70% of the capitalization of the Nairobi Securities Exchange. The slot is allocated to markets/sectors as follows; Agricultural sector 2, Finance 5, Commerce 4, Industries 5 and AIMS 1 totalling to 20 companies (NSE, 2010b). 

In order for a company to qualify for inclusion in the Index, it should meets the following conditions: (i) must have at least 20% of its free float available for trading at the NSE, (ii) must have been continuously quoted for a least 1 year, (iii) must have a minimum market capitalization of Kshs 50 million, (iv) Should ideally be a “blue chip” superior profitability and dividend record and (v) Shares must have their primary listing on the Nairobi Securities Exchange. Over and above the listed criterions, market capitalization is the underlying criteria for inclusion in the index if companies fulfil all other inclusion requirements (NSE, 2010b). 

Periodic reviews of constituent companies of the NSE 20 share index is done on a quarterly basis by the index management sub-committee. The reviews is based on data collected for a period of one year as at the end of each quarter, and details of the outcome of the review are published as soon as possible after recommendations of the Index Management Sub- Committee have been endorsed by the Trading Committee and ratified by the Board. However, the change for the constituent companies are initiated and implemented as soon and when need arises (NSE, 2012). 

Changes to constituent companies for inclusion/deletion are initiated in any of the following circumstances. First, a constituent company is delisted, if it ceases to have a firm quotation, or is subject to a takeover offer that has been declared wholly unconditional, or has in the opinion of the index management sub-committee, ceases to be a viable constituent as defined by the ground rules. Conversely, in cases of mergers, restructuring and complex takeovers, if the effect of a merger or takeover is that one constituent is absorbed by another constituent, a vacancy is created in the index. However, if constituent company is taken over by a non- constituent company, the original constituent will be removed and replaced by the merged entity (NSE, 2012). 

In the event of new issue, if a new issue is so large that the effectiveness of the index as a market indicator would be significantly and adversely affected by its omission, the sub- committee may recommend to the trading and compliance committee for its inclusion before the lapse of the one year clause (ibid). Summary of NSE 20 share index constituents’ companies review from the year 2000 to 2012 is attached as Appendix III 

Inclusion of Mumius Sugar Company Shares into NSE 20 Share Index 
Mumias Sugar Company was incorporated on 29th June 1971 following the Government adoption of a feasibility study carried out by a Bookers Agriculture and Technical Services, a subsidiary of Booker McConnell (which is now BTL). At incorporation, the majority shareholding was the Government (70.76%) and minority interests held by the DCE (17.18%), KCFdC (5%), Booker McConnell (4.41%), and the EADB (2.65%). However, the Company produced the first sugar in 1973 (MSC, 2013) 

Since its first production, the company has experience tremendous growth and expansion to become the industry giant controlling over 60% of the market. It has also diversified into power production, water and ethanol production (MSC, 2013). Milling capacity has expanded from 80 tons of cane per hour to 125 tons of cane per hour in 1976, to 300 tons of cane per hour in 1979 and a major expansion of the factory in 1985 resulting to a potential capacity of 210,000 tons of sugar per year. The company currently produces 34 MW of electricity, 42 million litres of water and 22 million litres of ethanol per annum (www.msc.co.ke). 

In 2001, the company was converted from a private to a public company and listing on the Nairobi Stock Exchange (NSE) under Industrial and Allied sector of Main Market Segment and. Six years later, the company become a constituent company of NSE 20 Share Index on 1 August 2007 (NSE, 2007). The announcement of inclusion was made on 20 July 2007 during the major NSE 20 Share Index Review that dropped six companies from its 20 share index constituent stocks and included new ones to reflect changes in market fundamentals since May 2003 when the index was last reviewed. The dropped companies were NIC Bank, BOC Gases, Unilever, Kakuzi, Uchumi Supermarkets and Williamson Tea. They were replaced by ICDC Investments, KenGen, Mumias Sugar, Rea Vipingo, Cooper Motors Corporation (CMC) and Express Ltd (ibid). 

The choice of Mumias Sugar Company as study case is arrived at following the long lapse of time between subsequent index reviews (May 2003 and Jully2007) and the wide gap between dates of review and inclusion on 20 July 2007 and 1 October 2007 respectively. This gap can be ideal for testing of information content in the market. Since then, Mumias Sugar Company has remains a constituent company in NSE 20 Share Index.

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