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Darla Moore School of Business


Moore School international business professor finds social influence in African stock market

May 29, 2017

After months of working with senior management at Kenya’s Nairobi Securities Exchange in 2008, Christopher Yenkey was offered a rare break: access to the electronic databases that record share trades. This information allowed him to track the trading behavior of all 1.3 million Kenyan investors. As an economic sociologist, Yenkey was particularly interested in investigating the effects of social networks within and across ethnic groups on stock exchange behavior.

Research across the social sciences has demonstrated that loyalties to social groups bias decision-making by amplifying perceived problems in members of other groups and perceived benefits of members of one’s own group. Darla Moore School of Business international business professor Chris Yenkey found that, rather than encouraging investment, profits earned by members of rival groups actually deterred profitable investment.

“The legitimacy of the stock tip was more about the ethnic identity that conveyed it rather than the material information of profit and loss it contained,” Yenkey said. “The larger lesson is that social distrust segments the market because objective information is less likely to be influential across antagonistic social groups.”

In Kenya, much of social, political and economic life is organized within ethnic groups. According to Yenkey, 97 percent of Kenyans marry within their ethnic group, and 95 percent vote within their ethnic group. These findings are published in a 2015 Administrative Science Quarterly article.

In a second Administrative Science Quarterly paper, Yenkey further examines the effects of ethnic groups on investment behavior by examining Kenyans’ reactions to being defrauded. He found that those cheated by stockbrokers within their own groups were more likely to continue to invest than those cheated by stockbrokers from rival groups.

Victims who belonged to the culprit’s ethnic group largely blamed the individual who committed the fraud, and they continued to invest by choosing a different stockbroker. However, victims from rival groups formed negative stereotypes about the corrupt broker’s larger ethnic group and, by discriminating against members of that entire group, restricted their ability to invest. From this, Yenkey argues that this makes future instances of fraud more likely because members of a social group are less likely to investigate themselves for governance problems.

Yenkey’s findings demonstrate that trust — or lack thereof — is a strong influence in emerging markets in developing countries. Ultimately, Kenyans rely on social stereotypes to make economic decisions, which is not much different from the way many people in more developed economies act. Yenkey concludes it is far easier to hold fast to what you think you know rather than dig deeper to find more information.

Yenkey is continuing his research in Africa by tracking the global flow of capital into Africa. Because of the connections he gained from his time in Kenya, he has access to a data set of financial transfers from every country in the world into each African country, allowing him to see which non-African countries are doing business with each African country over time. Specifically, he is examining how developing countries react to changing levels of corruption across Africa and whether Western investors interpret Chinese involvement across Africa as a positive signal of opportunity or a warning that the country is less suitable for Westerners.

By Madeleine Vath