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African Journal of Commercial

AJoCsOpen
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Review Paper Open Access

Corporate Ownership transfer: The role of stock market

in Ethiopia
Girma Gudde Jote*
1
Dilla University – AcFn, Dilla, Ethiopia. E-mail: [email protected]

Abstract
Article Info

Volume 3, Issue 3, N ov em b e r 2023

Accepted : 20 October 2023
Published : 26 October 2023

doi: 10.59413/ajocs/v3.i3.1
Ark: ark:/69431/AJoCS.v3i3.1

© 2023 Girma Gudde Jote This is an open access article under the CC BY license
(https://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and
reproduction in any medium, provided you give appropriate credit to the original
author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

are enforceable records that evidence an individual's

1. Introduction
ownership stake in a corporation (referred to as shares) or a
A stock market bears resemblance to other markets, albeit debtor-creditor association with a corporation or
it possesses a unique characteristic in relation to the government, specifically equities and fixed-income
categories of commodities exchanged and its structure. It securities. Stock markets are divided into two categories:
encompasses the exchange of financial instruments, which primary and secondary.
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Primary markets are physical marketplaces in which Furthermore, the exchange is poised to present an avenue
companies make their shares available to the general public for the privatization of Ethiopia's government-owned
for the first time. This process is commonly referred to as an enterprises. Over the past few years, the administration has
Initial Public Offering. In these marketplaces, shares are diligently implemented numerous reforms with the aim of
sold through intermediaries or financial institutions acting liberalizing the economy, and the introduction of a
on behalf of the issuing company. On the other hand, securities exchange is anticipated to serve as a catalyst for
secondary markets act as a platform for the resale of attracting fresh investments from the private sector. EIH, a
securities that were initially traded in the primary markets. prominent stakeholder within the ESX, is also expected to
The buying and selling of shares and stocks in secondary bolster the exchange by offering a series of listings, primarily
markets take place within a highly sophisticated marketplace consisting of minority stakes, derived from its expansive
where stocks and shares are treated as tradable assets. business portfolio valued at $38 billion. It is widely
speculated that a span of two years may still elapse before
In both markets, only the securities of companies that
the ESX officially commences trading activities. Equities,
satisfy specific criteria of a designated stock exchange are
derivatives, financial and debt securities, as well as FX
eligible for trading. Nevertheless, the quantity of traded
contracts, are anticipated to be traded on this platform. The
securities in the secondary markets surpasses that of the
country presently suffers from a dearth of stockbrokers,
primary markets by a significant margin. Consequently,
investment advisors, fund managers, custodians, and
secondary markets fulfill crucial economic roles in addition
various other essential entities.
to facilitating the trading of stocks and shares. The initial
pivotal role of secondary markets is to indicate the level of Ethiopia has granted its approval for a novel Capital
efficiency exhibited by companies. This is manifested Markets Establishment Proclamation in 2021, thereby
through the continuous adjustment (both upward and laying the legal groundwork for the advancement of capital
downward) of securities prices. By doing so, secondary markets within the nation. This measure aims to bolster
markets direct capital towards companies that demonstrate economic progress by fostering augmented capital
superior performance, thereby ensuring the effective mobilization, financial ingenuity, and risk distribution in
allocation of resources (in this instance, capital). investment ventures. The implementation of this
proclamation paves the way for the founding of the
The establishment of a stock market has been a widely
Ethiopian Capital Markets Authority (CMA), which will
debated topic in Ethiopia for nearly twenty years. Certain
assume the role of the capital markets overseer.
individuals contend that the presence of a capital market is
Additionally, this measure permits the establishment of self-
essential due to the prevailing scarcity of financial resources
regulatory organizations such as the ESX, as well as the
in both domestic and foreign currencies. Conversely,
Securities Depository and Clearing Company.
opposing viewpoints highlight the underdeveloped nature
of financial reporting and delicate corporate governance The Capital Markets Proclamation (No. 1248/2021)
systems, as well as the absence of a necessary legal framework stipulates that the establishment of the exchange as a Share
and a notably feeble private sector. In contrast, the Company (a public company under Ethiopian law) will be
government maintains a steadfast position on the matter. undertaken by the government in collaboration with the
This is why EIH signed a Cooperation Agreement with MoF private sector, including foreign investors. The ownership of
and FSD Africa to establish the ESX On May 18, 2022 (FSD the ESX will be distributed among corporations, capital
Africa, 2022). ESX is a key market institution that will market intermediaries, and operators of international
provide Ethiopian entrepreneurs and businesses with access securities exchanges, with a range of 25% to 55%, while the
to long term finance. Ethiopia's sizable and formidable government's ownership will not exceed 25%. The ESX will
sovereign wealth fund, EIH, is partnering with the Ministry function as a profit-oriented entity. The Project Team is
of Finance of the nation and FSDA, headquartered in tasked with formulating the ESX business plan and its
Nairobi, to establish the ESX. EIH has established a Project organizational framework, as well as delineating the various
Team in conjunction with FSDA, which enjoys support market segments. Furthermore, the team will spearhead the
from the British government's development aid. development of the ESX trading regulations, policies, and
Furthermore, EIH has extended invitations to consultants procedures, the trading and operational systems, and other
to submit bids for a fundraising initiative aimed at information and communication technology infrastructure.
procuring capital for the novel stock exchange. Ultimately, the team will establish and inaugurate the ESX
operations (Minney, 2022).
A minimum of 50 companies, encompassing both
banking and insurance institutions, are projected to initiate
listing procedures at the commencement of the exchange, as 2. Statement of the problem
reported by Minney (2022). This exchange has been The prevailing pattern demonstrates that Ethiopia
meticulously devised to furnish a platform for the possesses an ample backlog of investment prospects and
acquisition of funds by small and medium-sized enterprises, resources to initiate a functioning capital market and
which serve as the backbone of the Ethiopian economy. securities exchange, provided that it is properly executed. A
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well-functioning capital market necessitates the involvement

of three key stakeholders: active investors, diverse 3. Objective of the study
companies to be listed, and various intermediaries like The objective of the study was to assess the existing
brokers, dealers, and investment banks. On the demand practice of ownership transfer and stock market in Ethiopia.
side, we are of the opinion that there exists a burgeoning
middle class with the potential and inclination to participate In line with the general objective, the specific objectives
in the securities market—a trend evidenced by the steady of the study are:
increase in the number of citizens holding bank shares over a) To identify the importance of stock market
the years. Furthermore, the revised mandate of the
b) To assess the existing practice of ownership transfer
Ethiopian Pension Agency permits its engagement in the
equities market, thereby unlocking investments from the c) To determine the challenges of ownership transfer
nation's largest stakeholder, with an approximate annual in the absence of stock market
outstanding balance of USD 3,181,006,000 (Mered, 2022).
d) To examine the current status of stock market
A fraction of the fund's investment in the securities
exchange will have a substantial impact on its liquidity and
performance. On the supply side, Ethiopia's expanding 4. Literature Review
financial institutions, including private banks and insurance Several intellectuals offer various definitions of the stock
companies, represent the primary potential candidates for exchange. To provide a few examples, Fabozzi and
listing. To a lesser degree, a few private companies in other Modigliani (1996) define stock exchanges as formal
sectors such as real estate, construction, and beverage also organizations comprised of members who utilize the facilities
qualify as eligible candidates. However, the most highly to exchange specific common stocks. The stock market serves
anticipated set of listings on the exchange will likely as a marketplace for securities of companies. Although share
comprise government-owned enterprises, including the companies may also release debt securities, the foundation
CBE, Ethio telecom, Ethiopian Airlines, Ethiopian of all corporate endeavors lies in shares. Shares furnish the
Shipping, and Logistics Enterprise—key pillars of the initial capital for a corporate venture. A stock exchange is
country's economy. It is anticipated that Ethiopian either a corporation or a mutual organization that furnishes
Investment Holdings, a sovereign wealth fund entrusted trading facilities for stockbrokers to engage in the trading of
with the consolidated management of the nation's most stocks and other securities.
profitable state enterprises, will restructure and partially Moreover, the stock market refers to the amalgamation
privatize these entities for the benefit of the private sector. of markets and exchanges where customary activities
By privatizing a small portion of these companies and listing involving the buying, selling, and issuance of shares of
them on the exchange, not only will diversification publicly-held companies transpire. These financial activities
opportunities for investors increase, but credibility will also are executed through institutionalized formal exchanges or
be conferred upon the exchange, thereby incentivizing over-the-counter (OTC) marketplaces that operate within a
foreign investments. predefined set of regulations. A country or region may
By leveraging its indigenous resources and drawing possess multiple stock trading venues, enabling transactions
lessons from the experiences of other nations, Ethiopia in stocks and other types of securities. A stock exchange
possesses the potential to serve as a host for one of Africa's functions as an entity that provides services to stockbrokers
financial centers. The experiences of various African and traders for the purpose of trading stocks, bonds, and
countries have demonstrated that a lack of liquidity, as other securities. Stock exchanges also furnish facilities for the
indicated by an exceedingly low turnover ratio, represents issuance and redemption of securities and other financial
the primary obstacle faced by numerous stock exchanges instruments, as well as for capital events such as the payment
throughout the continent. Insufficient liquidity translates of income and dividends. Securities traded on a stock
into difficulties in establishing and maintaining a local exchange encompass shares issued by companies, unit trusts,
securities exchange, complete with its own trading system, derivatives, pooled investment products, and bonds
market analysis, brokers, and related components, due to (Kibuthu, 2005).
the limited business volume. This predicament can be Therefore, based on the aforementioned definitions, it
attributed to a combination of stringent regulations, the can be postulated that a stock exchange encompasses a
absence of online trading capabilities, a dearth of stock designated physical location and operates as a formal
market visibility, and, above all, an insufficient number of establishment comprised of members. Within this
listed companies. Consequently, conducting an evaluation framework, various financial assets, such as ordinary shares
of the current practices of ownership transfer and the and debt securities, are exchanged. Stock exchanges yield
requirement for the development of the stock market is numerous advantages within the realm of the economy, and
highly advantageous for Ethiopia. these advantages are inherently connected and mutually
reliant. A well-established stock exchange assumes the
responsibility of generating capital for businesses, mobilizing
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savings for investment purposes, facilitating corporate Ethiopia, several companies offer their initial offering to the
expansion, enabling profit distribution, enforcing corporate public directly pitching a prospect of profitability. The
governance, fostering investment opportunities for small- country’s practice is unique in that, its success hinges on the
scale investors, facilitating government capital acquisition for trustworthiness of the people issuing the stock rather than a
development initiatives, and serving as an indicator of the proven business. In some cases, this approach has brought
overall economic climate. great disappointment to shareholders as they failed in
According to Wakuma (2019), Ethiopia is aspiring to operations. A stock exchange would help develop the
reach the low -middle income group joining its neighboring concept of due diligence done by investment banking or
countries like Kenya, Djibouti and Sudan by 2025. A underwriters where the financial professionals would
financial infrastructure like a stock exchange is a proven scrutinize the prospect, buy bulk shares and retail it to the
concept that advanced countries have long used. More than public through an exchange.
80% of the countries in the low-middle category have already Secondary market is a market where investors sell those
set up stock exchange. In the early 80’s, Africa had only 8 issued shares to other buyers. In simple terms, this can be
active markets but in 2019 it has risen to 29 exchanges. The likened to buying a second-hand car from the market; only
roots of the stock exchange go more than 400 years back stocks do not depreciate over time. Instead of doing a test
when ship explorers sold shares to finance their voyages to drive or looking at the mileage, one will look into its past
the uncertain seas. East India companies sold shares with performance and assess its future potential. Like a river that
dividends by spreading their risks and sharing their returns. flows throughout a land, a constant flow of money brings
This made way for larger and multiple fleets with increased health to a nation’s economy. In one extreme, non-liquid
profits. Traders started selling shares to others informally at market discourages investment whereas on the other end of
public spaces like coffee shops. And as such, the stock the spectrum highly liquid markets lead investors to be short
exchange was born. Antwerp, Amsterdam and London stock sighted at the expense of the project. Currently in Ethiopia,
exchange were the earliest exchanges. it is estimated that there are close to 1000 share companies
In due course, after selling shares became popular, that have sold shares to the public. However, there is no
nations started experiencing the hazards that come along place where the owners of these shares can go to find
with it. Business men went on to sell shares to the public over interested buyers. Not all of these companies would comply
unreal prospects bringing loss to households. These events with the regulatory standards that would be required for
were the first in line to demonstrate the need for regulation listing of course. But the establishment of a stock exchange
in stock exchange. Surfacing scams and other macro- would create a platform where those shares can easily be
economic devastation linked to SE led to the establishment transferred to others and so on. The market worth of
of legal bodies by which nations govern their exchange. common tangible assets in Ethiopia like real estates and
vehicles can easily be determined and transacted quite
Today, the top stock exchange of the world is the NYSE
frequently. On the contrary, anyone in possession of shares
with a market capitalization of 30 Trillion USD. The first
will have a hard time determining its market value or finding
stock traded was the bank of New York. Other exchanges
a buyer.
like the TSE first opened in 1878 trading precious metals
and government bond. SSE launched originally in the 1860s Assuming an appropriate regulatory body is set parallel
it was later shut down by the communist government in to the Stock Exchange; an exchange puts pressures on share
1949 and opened in 1990 after 40 years. Most stocks traded companies to be transparent about their financial health and
in the beginning were state run companies, banks and performance. This allows the public to have access to
insurance. The JSE is Africa’s biggest exchange launched in information of any listed company. This is very helpful in
1887. In terms of ownership, most of the global exchanges reducing risk as well as encouraging investment. Although
are evolving into publicly traded companies, owned by there are cases where the stock market widens the gap
banks, insurance, brokers and mutual funds. An exception, between the rich and the poor, the stock market in its essence
however, is the Shanghai stock exchange which remains allows citizens to invest and divest their money in any listed
government owned. company. The return/loss for their shares will be governed
by the size of the seeds sown and the performance of the
Across the globe, more than 600,000 companies are
companies. It is hard to expect major portions of our
traded on a daily basis. The global average return for stocks
population categorized as low-income earners to make large
has been around 6.6% for the last 200 years. The primary
investments. However, organized in investment groups or
reason for selling stocks commonly known as IPO is raising
clubs they can become active participants in various
capital for long term without being in debt. In this case, the
industries.
company sells shares to many investors. This allows
companies to tap into a huge capital base for its business. In There are grounds to believe that listed companies would
developed markets, companies’ initially start as a private perform better with increased efficiency of governance as it
entity then demonstrate success for a period of time before increases the conflict between the suppliers of capital and the
they offer their shares to investors and the public whereas in management. Listed companies are expected to adopt a set
of governing practices that are designed to help them build
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lasting businesses. It is customary to share companies in Numerous seminars and studies have been conducted by
Ethiopia to hold shareholder meetings once a year at least in various scholars, all emphasizing the necessity of establishing
the banking industry to disclose how they performed. If these a capital market in Ethiopia. In 1995, a group of
banks are listed however, they would be obliged to disclose entrepreneurs, organized as the Ethiopian Share Dealing
their performance on a regular basis. Any other major Group under the Addis Ababa Chamber of Commerce and
internal issues that would affect the company would have to Sectoral Associations, initiated a share dealing group similar
be reported to the public early. to the former Addis Ababa Share Dealing Group of 1974.
From a nation building vantage point, it is possible that This group spearheaded the development of Stock Exchange
collective ownership of previously state-owned enterprises rules and regulations, as well as the bylaws of a share dealing
could increase unity in citizens as ownership of profitable group. Additionally, Ernst & Young were commissioned to
company brings solidarity at some level. The Ethiopian create an internationally standardized rules and regulations
government has had failed attempts in transferring the manual (Ruecker 2011).
ownership of some SOEs. This is partly because prudent In the year 2008, the National Bank of Ethiopia (NBE)
investors not only want opportunities of investment but also initiated a study on the development of infrastructural
the possibility of cashing out all or portions of it should they aspects of the capital market. This study was undertaken with
choose so. The Stock exchange can be used bring clarity on the assistance of international consultants as part of the
the real market worth of companies like Ethiopian Airlines, Financial Sector Capacity Building Project. The main focus
Ethio-Telecom, Sugar Corporation etc.as it would set to of the study was on the enhancement of the capital market
motion the forces of supply and demand. Moreover, this it infrastructure in Ethiopia. The funding for this initiative was
might be easier to collect small amounts of money from provided by the World Bank (WB) due to the expressed
several local investors rather than a huge sum from a hand interest of the Ethiopian government. Despite the
full of foreign investors. At least doing so, it’s possible to aforementioned efforts, up until the present time, Ethiopia
reduce the huge demand for paying dividends in foreign has not established a stock exchange market, nor has it
currency at a later stage. The SE can reduce opportunity cost. allowed companies to be listed on foreign exchanges.
Any lost investment opportunity because of lack of Consequently, share trading has been conducted through
information is an opportunity cost since it is money that alternative methods such as the utilization of part-time
could have been used to bring profit. brokers, reliance on the invested companies themselves, or
When examining the historical progression of the stock the responsibility falling on the seller to locate buyers.
market in Ethiopia, one can trace its origins back to the Unfortunately, these methods expose the seller to potential
Imperial period. During this time, Emperor Menelik II, in disadvantages such as unfair pricing and delays. It is
1897, utilized the sale of shares in France to acquire a important to note that the absence of appropriate
portion of the necessary 40 million francs required for institutions to facilitate trade is the primary cause for these
constructing the Ethio - Djibouti railway line. Subsequently, circumstances, rather than any shortage of buyers and sellers
in 1906, the Abyssinia Bank, the first bank in Ethiopia, made in the market (Tsegaye, 2007).
its shares available in Addis Ababa, New York, Paris, To overcome the challenges of ownership transfer and to
London, and Vienna. From 1960 to 1974, the stock market realize the benefits of having well developed stock market,
experienced significant growth, with multiple share very recently Ethiopia approved a new Capital Markets
companies flourishing and the National Bank of Ethiopia Establishment Proclamation in 2021. This is mainly to
overseeing share trading through the Addis Ababa Share provide the legal foundation for the development of capital
Dealing Group. Prominent share companies during this markets in the country and to support economic
period included Addis Ababa Bank, Ethiopia Abattoirs, development through increased capital mobilization,
Bottling Company of Ethiopia, Indo - Ethiopian Textiles, financial innovation, and risk sharing in investment. The
HVA Ethiopia, and Tendaho plantations. However, all these proclamation clears the way for the establishment of the
companies were nationalized in the 1974/75 socialist Ethiopian CMA, the capital markets regulator, as well as self-
revolution, which detrimentally affected the private sector- regulatory Organizations like the ESX and the Securities
led economy. Depository and Clearing Company.
Following the change in government from socialism in
1991, interested parties, such as the Addis Ababa Chamber 5. Research Methodology
of Commerce and Sectoral Associations, made efforts to The descriptive research design was employed in this
reintroduce the stock exchange market in Ethiopia. Ruecker study to elucidate the prevailing practice of ownership
(2011) highlights that in 1995, the National Bank of transfer in share companies in Ethiopia. This design also
Ethiopia conducted a study on the Feasibility of Establishing aimed to assess the necessity of a stock market and to explore
a Securities Exchange Market in Ethiopia and prepared a the challenges associated with the transfer of ownership and
draft securities and exchange proclamation, which is the establishment of a stock market in Ethiopia. In order to
currently pending government endorsement. achieve the desired outcomes and provide detailed evidence
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regarding these issues, a case study research design was Total 8 100
adopted using a qualitative approach. To gather responses Finance 3 37.5
from various stakeholders, including managers and Human resource 3 37.5
shareholders, a qualitative approach was employed. The Division of Sourcing & 2 25
target population of this study consisted of the management work facilities
bodies and shareholders of share companies in Ethiopia. Total 8 100
Purposive sampling technique was utilized, and data
Staff 0 0
collection was facilitated through the use of convenient
Holding Supervisor 0 0
sampling. The primary sources of data were employed to
position Manager 8 100
ensure sufficient information was obtained from the target
Total 3 100
respondents. Structured questionnaires were administered
Source: Survey result, 2022
to gather primary data from managers and shareholders.
After the completion of the data collection process, the
collected data were analyzed using descriptive analysis Table 2: Issuance of shares & share transfer
techniques, such as percentage and tables. Given that the Number of Percentage
primary data collected, particularly through the respondents
questionnaires, encompassed both quantitative and For what purpose your company issued the share?
qualitative aspects, descriptive analysis technique was
For setting up cost 0 0
employed.
For financing short-term investment 3 37.5
For financing the acquisition of 0 0
6. Results and discussions supplies
This part of the research showcases information collected For financing long-term investment 2 25
For financing long-term investment 3 37.5
through the use of questionnaires. The findings are
and diversifying the risk of financing
presented and scrutinized in order to fulfill the aims of the
Total 8 100
investigation. A sum of 110 questionnaires were dispersed
How did you determine the price of your share to sale it to
among company managers (10) and company shareholders
investors (What are the determinant factors for pricing your
(100) alike. Out of the complete set of questionnaires shares)?
distributed, 8 were distributed to share company managers The profitability of the company and 4 50
and 84 to shareholders of companies, yielding a total of 92 the demand per share of a company.
(83.63%) respondents who provided their valuable insights The goodwill of the company. 2 25
and feedback. The market place, demand for and 2 25
supply of shares, management of a
6.1. Analysis of data collected from managers of Share company, goodwill and the
Companies economy.
Total 8 100
Table 1: General information of the respondents (managers of Where and how your company did sell its share to investors?
companies) From company’s head office 8 100
Description Number of Percentage Total 8 100
respondents At what circumstances and interval your company issues the
Male 5 62.5 share?
Gender Female 3 37.5 It is based on the need to increase 5 62.5
Total 8 100 the paid up capital and National
25-35 0 0 Bank of Ethiopia’s requirements.
36-46 8 100 There is no interval; it depends on 3 37.5
Age Group 47-50 and above 0 0 the need of organizations
Total 8 100 Total 8 100
Below Diploma 0 0
Diploma 0 0 How do holders of ownership stock transfer to other whenever
Educational BA/BSC 3 37.5 they need to liquidate their investment in your company?
Status Masters & above 5 62.5
Total 8 100 Selling back to your company 1 12.5
1-5 0 0
To shareholders of your 5 62.5
6-10 0 0 company
Service year 11-15 6 75 Selling to brokers or through 2 25
brokers
16-20 2 25
Total 8 100
20 and above 0 0
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Did your company hold shares of there exists an ample degree of consciousness and
another share companies? understanding pertaining to the advantages and
Yes 6 75 fundamental principles of stock exchange markets within the
No 2 25 nation. Share Companies address the issue of adherence by
Total 8 100 incorporating a clause in the agreement, which absolves the
If your answer for the previous question is yes, for what purpose shareholders from any obligation to repurchase the shares,
your company acquired other companies share? and by facilitating their acquisition by potential buyers, such
as brokers.
To influence the financial and 6 100
Legal infrastructural factors of a stock exchange markets
operating policies of the investee
company, the investor company is concerned with the protection of investors, efficiency of
acquires shares of other companies markets and reduction of systematic risk. Most of the
Total 6 100 respondents respond that legal infrastructural factors do not
Do you think that the establishment of stock market in Ethiopia influence the establishment of stock market in Ethiopia. All
is important? respondents answer that accounting and auditing standards
Yes 8 100 do not influence the practice of ownership transfer. On the
No 0 0 macroeconomic stability, most of the respondents have
Total 8 100 stated that macroeconomic condition will affect stock
market establishment. All respondents agree that the
Source: Survey result, 2022 establishment of stock market or the practice of ownership
transfer is influenced by increase in the cost of living due to
Share companies issue their shares for the purposes of high rates of inflation, low income and saving capacity of
financing short-term and long-term investments, and for individuals and low domestic investments and productions.
diversifying the risk of financing. The selling price of shares Absence of the proper institutions that could facilitate the
is determined by the profitability of the issuing company and trade affects the practice of ownership transfer, and low level
the demand for shares. All of the share companies sell their of public awareness and trust about stock markets also
shares from their head office. Most of the respondents influences the practice of ownership transfer.
respond that share companies issue shares based on the need The potential or possibilities for the establishment of a
to increase the paid up capital and National Bank of stock market in our nation encompass the objective of
Ethiopia’s requirements. Shareholders liquidate their reducing poverty within the country, the augmentation in
investment on the shares of companies by selling it to other both the magnitude and quantity of Share Companies, the
shareholders of companies. As per most of the respondents’ rise in the number of specialists, advancements in the
response, share companies hold shares of other companies banking and other financial domains of a nation, the
for the purpose of influencing the financial and operating ongoing economic development and expansion, the
policies of the investee company. All respondents of the escalation in the proportion of domestic savings, as well as
managers surveyed, who have the knowledge of stock the nation's foreign relations and policies.
exchange, depicts that they think of establishing stock
exchange. 6.2. Analysis of data collected from Shareholders
Most of the managers in the respective share companies Table 3: General information of shareholders
hold the belief that the establishment of a stock exchange in Description Number of Percentage
our nation at this particular juncture serves to facilitate the respondents
ease with which shares can be bought and sold, bridging the Male 64 76.2
Gender Female 20 23.8
gap that exists in bank loans which typically necessitate
Total 84 100
substantial collateral. Additionally, this establishment also < 20 0 0
helps to streamline the process of mobilizing domestic 20-30 31 37
resources, creating alternative avenues for saving and Age Group 31-40 25 29.76
investment, accessing alternative sources of finance, 41-50 24 28.57
attracting a greater number of domestic and foreign 51-60 0 0
>60 4 4.76
investors, and facilitating the ongoing and future Total 84 100
privatization objectives of the country. As well, it also Illiterate 0 0
promotes efficient financial system, allow de-concentration 1- 4 grade 2 2.38
of ownership, improve accounting and auditing standards, Educational 5- 12grade 20 23.8
Status Certificate 62 73.8
provide effective tools for monetary and fiscal policy and
and above
help privatization efforts by the government. This in turn Total 84 100
contributes to the economic growth of the country. All of the Civil 14 16.67
surveyed managers have indicated that the need for stock service
market in Ethiopia is high. The response demonstrates that Trade 40 41.61
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Current job Agriculture 12 14.28 Based on the expected growth 4 4.76

2 2.38 of financial sector
Information By the status of a company in 10 11.9
technology the country
Mechanical 2 2.38 By the profitability of a
company and expected 40 47.6
Accounting 4 4.76 dividend per share of a
company
Banking 10 11.9 Based on the par value and 14 16.67
stated value of a share
Total 84 100 Total 84 100
4. At what circumstances and interval your company issues
< 1 year 6 7.14
the share?
How long you 1-3 years 22 26.2
are a stock 3 – 6 months 10 11.9
3-5 years 24 28.57
holder? 1 – 2 years 20 23.8
>5 years 32 38
3 – 5 years 16 19
Total 84 100
No fixed interval; whenever a 20 23.8
company’s management
Source: Survey result, 2022
planned to increase share
capital
Table 4: Existing practice of ownership transfer in Ethiopia No fixed interval; whenever 18 21.4
Description Number of Percentag shareholders of a company
respondents e required acquiring additional
1. For what purpose you have purchased the shares of a shares and BOD approved
company? the questions.
To establish a company 4 4.76 Total 84 100
To obtain a source of 56 66.67 5. When you decided to sell the shares, to whom to sell?
income (dividend) Selling back to the 22 29.2
To earn gain on sale of 12 14.28 issuing company
securities when their price To shareholders of 18 21.4
appreciate issuing company
To establish a company and 6 7.14 Selling to brokers or 34 40.47
to earn profit through brokers
To provide the shares as a 4 4.76 To family members 10 11.9
gift Total 84 100
To accumulate permanent 2 2.38 6. How do you find the potential buyers for your shares?
source of income for children Through discussion with 38 45.23
Total 84 100 potential buyers of shares
Through advertisement 10 11.9
2. Where and how you have purchased the shares of a made by the issuing company
company? By using brokers 22 29.2
Through brokers paying the 8 9.5 By requesting the issued
commission company to repurchase 14 16.67
By hearing/reading 46 54.7 the shares through face-
advertisement made by the to-face discussion and
issuing company through calling them
social medias, and directly Total 84 100
from the company on 7. Did you face market problem when you were reselling
percent basis the shares of companies?
In the form of stock bonus 4 4.76 Yes 22 26.2
from the share company No 62 73.8
When the company offers 8 9.5 Total 84 100
the opportunity to 8. If your answer to question no. 7 is yes, what you finally
purchase the shares before decided?
new investors Holding the shares 8 36.36
From other shareholders 4 4.76 Selling the shares by 10 45.45
From the country’s private 14 16.67 brokers
banks and public banks and I told my friend to find 4 18.18
other agents of the issuing the potential buyers
company Total 22 100
Total 84 100 9. If your answer to question no. 7 is no, how you find the
3. How did you determine the price of share to purchase buyers to sold your shares?
from the issuing company? By internal advertisement
Based on the expected and price determined by 22 35.5
number of company’s 16 19 the company’s board of
shareholders and directors.
authorized shares to be Through brokers at price 12 19.35
issued twice the par value of the
share
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By bargaining with 28 45.16 shareholders did not face market problem and they find the
buyers at existing market buyers through internal advertisement at price determined
price
by the company’s board of directors or by bargaining with
Total 62 100
10. Do you think that the buyers based on existing market price of the share.
need for establishment of The analysis implies that most of the respective managers
stock market in Ethiopia is
important? in the share companies believe that establishment of stock
Yes 84 100% exchange in our country at this time helps to easily sell and
No 0 0% buy shares, to fill the gap of bank loans which require huge
Total 84 100 collaterals, to facilitate the mobilization of domestic
11. Was it easy to purchase or
resources, to create alternative channels for saving and
sale shares to investors?
Yes 20 23.8 investment, to obtain alternate source of finance, to attract
No 64 76.2 more domestic and foreign investors and to facilitates
Total 84 100 ongoing and future privatization goal of the country. As well,
12. If your answer is no for it also promotes efficient financial system, allow de-
question 10, what were the
concentration of ownership, improve accounting and
challenges?
Lack of fair and appropriate 18 21.42 auditing standards, provide effective tools for monetary and
price fiscal policy and help privatization efforts by the government.
The payment of large 34 40.47 This in turn contributes to the economic growth of the
amount of brokers’
country. To most of the shareholders (76.2%), it is difficulty
commission
Difficulty of obtaining buyers 32 38 to purchase or sale shares primarily because of the payment
Total 84 100 of large amount of brokers’ commission and difficulty of
13. Is there any compliance obtaining buyers. As well, there is no compliance from the
from the issuing issuing companies to sell the shares back to them. The study
company to sell the
shares back to them? reveals that the absences of well-organized market for share
Yes 24 28.57 trading tending to frustrate the existing shareholders and
No 60 71.42 discouraging the new shareholders to get into share company
Total 84 100 business.
14. If your answer is yes for
question 13, what were the As per the results of the study, the legal factors that
reasons of complains? potentially affect the establishment of stock exchange market
The company hesitate to 30 35.71 or the practice of ownership transfer include the degree of
repurchase the shares by
believing that other
stability, peace and internal security of a country, inadequate
shareholders may not laws and regulations. Lack of good regulation and
purchase them supervision that provides protection investor from (the
Lack of interest to share the 54 64.28 potentially opportunistic behavior of insiders) solves agency
ownership interest to other
problems and information asymmetry arising from inside
company’s shareholders
Total 84 100 information and deficient corporate governance affect the
willingness to invest negatively. Public authority is
responsible for securities regulation to protect investors and
Shareholders invest on the shares of different companies the economy from malpractice. The finding of the study
to obtain a source of income (dividend) and to earn gain on shows accounting and auditing standards influence the
sale of securities when their price appreciates. The study practice of ownership transfer. On the macroeconomic
reveals that most shareholders purchase shares by stability, macroeconomic condition affects stock market
hearing/reading advertisement made by the issuing company establishment. The establishment of stock market or the
through Social Medias and directly from the company on practice of ownership transfer is influenced by increase in the
percent basis, and from the country’s private banks, public cost of living due to high rates of inflation, low income and
banks and other agents of the issuing company. The finding saving capacity of individuals, and low domestic investments
indicates that most shareholders determine the price of and productions. The study reveals that technological
shares on the basis of profitability of a company and expected infrastructure influences the establishment of stock market
dividend per share of a company, expected number of in the country. Insufficient technological infrastructure such
company’s shareholders and authorized shares to be issued, as ICT influences the ownership transfer practice of the
and par values or stated values of the shares. country; lack of competent experts in the financial sector and
Most of the shareholders sell their shares to brokers or limited number of companies in the industry also challenges
other parties through brokers. This study indicates that the establishment of stock market. The analysis shows that
shareholders who decided to sell their shares find buyers the absence of the proper institutions that could facilitate the
through discussion with friends, relatives and other buyers, trade, and low level of public awareness and trust about stock
and through brokers. As the above table shows, 73.8 % of markets influences the practice of ownership transfer. The
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establishment of a stock market in the country can be seen intermediaries in Ethiopia. The country will be able to
as a means to achieve the poverty reduction goal of the provide finance for start-ups, mainly potential Fintechs. They
nation. Furthermore, it can lead to an increase in the size are the ones in which all the finances in the stock exchange
and number of Share Companies, as well as an increase in will be invested. There are different companies trying to
the number of experts in the field. Additionally, the mobilize funds. Hence, it is feasible to invest in them and
development of the banking and other financial sectors subsequently list them on the stock exchange once they
within the country plays a significant role. The current experience growth. Moreover, it is also feasible to
economic development and growth can also contribute to concentrate on start-ups and investments in renewable
the opportunities for establishing a stock market. Moreover, energy, technology innovation, and other businesses. The
the increase of foreign investment in the nation and the nation has the option to seek local capital providers, who will
inflow of the nation's citizens who were abroad can have an take the funds and invest them in businesses. They possess
impact. Lastly, the nation's foreign relations and policies can information about the businesses and startups that hold
also play a part in shaping the opportunities for a stock
promise.
market establishment.
Regarding Initial Public Offerings, there exist numerous
7. Conclusions and recommendations companies in Ethiopia that possess the potential to be listed
The establishment of the ECX will introduce a new era on the stock market, once it has been operationalized. For
in Ethiopia's financial industry and economy. FSD Ethiopia example, banks, insurance firms, state-owned enterprises,
and EIH, who are now responsible for establishing ESX, international hotel brands in Ethiopia, and other business
must exert considerable effort to actualize the creation of a ventures have the possibility of being listed as Initial Public
prosperous stock exchange in Ethiopia, which will be a Offerings. The prosperity of the stock market is contingent
momentous milestone. It would be advantageous if the stock upon the level of investment Ethiopia will allocate to the
exchange brings about a tangible transformation in the necessary institutions responsible for establishing a stock
economy. The stock exchange will serve as an ideal market. It is widely recognized that the stock market serves
alternative source of financing for Ethiopia's economy, as a catalyst for economic growth in other nations. The
wherein access to finance remains a hindrance to growth. introduction of a stock exchange offers an array of
Moreover, it will play a crucial role in long-term financing, advantages. Upon examining the experiences of Kenya and
which is currently lacking in Ethiopia. The banks currently Mauritius, it is evident that they have attained a certain level
only finance short-term businesses. Additionally, the stock of sophistication in the realm of stock exchange. However,
exchange can serve as a means of financing for the even they admit that their stock markets are not as dynamic
government through the issuance of bonds, as well as for as they aspire them to be. It would be imprudent to compare
banks themselves. this situation with that of Ethiopia, a nation endeavoring to
establish such a market for the first time.
Nevertheless, Ethiopia has not yet begun the crucial task
of establishing a stock market, which entails the creation of Ethiopia has the potential to make significant
essential entities such as rating agencies, intermediaries, advancements in the field of stock exchange through the
broker firms, investment arms, and other vital components adoption of the latest stock exchange model. The fact that
necessary for a thriving stock exchange ecosystem. The Ethiopia is a late entrant in the stock exchange realm has
implementation of real-time data generating systems, shielded us from the fluctuations and uncertainties.
international corporate governance and financial reporting Consequently, there is no necessity to reinvest in novel
in initial public offerings (IPOs), and the training of models. Presently, the nation can rely on the experiences and
personnel are significant endeavors that have yet to be achievements of other countries to construct a contemporary
addressed. The initiation of the necessary legal frameworks, and efficient stock exchange model. FSD Ethiopia can
the establishment of the required institutional provide invaluable expertise, accumulated over the years, by
infrastructure, and the development of the essential expertise supporting numerous economies across the globe. In
to operate a stock exchange should have commenced earlier. addition to serving as an alternative source of financing for
Now, there is a sense of urgency. However, this is entrepreneurs, start-ups, corporations, and the government,
unquestionably one of the most noteworthy policy measures the stock market is also anticipated to fundamentally
ever implemented by the government, signifying a significant transform Ethiopia's economy. It’s of great benefit if stock
turning point for both the financial sector and the economy. market is designed in a way it can become a source of finance
for the private sector, not an arm of the government to fill
Ethiopia lags behind and is among a small number of
budget deficits. To that end, especially the roles of EIH in
countries that lack secondary capital markets. Given
the upcoming stock market need to be clearly legislated.
Ethiopia was under a communist regime and anti-capitalist
Through the initiation and development of stock market, it’s
three decades ago, Ethiopia is catching up on its own
possible to change the existing challenges of ownership
timeline. Once the stock exchange is operational, we will be
transfer or stock exchange in Ethiopia.
searching for innovative financial corporations and
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Acronyms
CBE – Commercial Bank of Ethiopia JSE - Johannesburg stock exchange

CMA - Capital Market Authority MoF - Ministry of Finance

EIH - Ethiopian Investment Holding NYSE - New York Stock Exchange

ESX - Ethiopian Securities Exchange OTC - Over-The-Counter

FSD - Financial Sector Deepening SOE - State-Owned Enterprise

FSDA - Financial Sector Deepening Africa SSE - Shanghai Stock exchange

FX - currency exchange TSE - Tokyo stock exchange

ICT - Information and Communications Technology USD – United States Dollar

IPO - Initial Public Offering

Acknowledgment
We would like to express our gratitude to the journal editor and the anonymous reviewers for their valuable
commentsand suggestions that significantly improved the quality of this manuscript.

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Kibuthu, G. W. (2005). Capital markets in emerging economies: A case study of the Nairobi Stock Exchange. Unpublished
MBA Dissertation.

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ethiopias-hidden-value/

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years#:~:text=According%20to%20FSDA%2C%20%E2%80%9CAt%20least,backbone%20of%20the%20Ethiopi
an%20economy.\

Ruecker, R. (2011). Market potential assessment and road map development for the establishment of capital market in
Ethiopia. Addis Ababa Chamber of Commerce and Sectoral Associations.

Tsegaye, E. (2012). Ethiopian stock exchange imperative. Addis Fortune, 12, 621.

Wakuma, Hawen (2019). Addis Ababa Stock Exchange expected in 2020. What does this mean to Ethiopians?. Linkedin.
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 Girma Gudde Jote / African Journal of Commercial studies. 3(3) (2023) 135-149 Page146 of 149

APPENDIX 1: The importance of stock market and challenges of stock transfer

Strongly disagree Neutral Agree Strongly
The importance of stock market in Ethiopia disagree Agree
No. % No. % No. % No. % No. %
It contributes to the economic growth of the 0 0 0 0 0 0 6 75 2 25
country
It helps to easily sell and buy shares 0 0 0 0 0 0 5 62.5 3 37.5
The securities market can fill the gap of bank 0 0 0 0 2 25 3 37.5 3 37.5
loans which require huge collaterals
The securities market can facilitate the 0 0 0 0 0 0 7 87.5 1 12.5
mobilization of domestic resources
The securities market creates alternative 0 0 0 0 0 0 2 25 6 75
channels for saving and investment
It serve as an alternate source of finance 0 0 0 0 0 0 5 62.5 3 37.5
It helps to attract more domestic and foreign 0 0 2 25 0 0 3 37.5 3 37.5
investors
The security market facilitates ongoing and 0 0 0 0 0 0 6 75 2 25
future privatization goal of the country
Promote efficient financial system 0 0 0 0 0 0 5 62.5 3 37.5
Allow de-concentration of ownership 0 0 0 0 0 0 7 87.5 1 12.5
Improve accounting and auditing standards 0 0 1 12.5 3 37.5 0 0 4 50
Provide effective tools for monetary and fiscal 0 0 1 12.5 0 0 7 87.5 0 0
policy
Help privatization efforts by the government 0 0 0 0 0 0 2 25 6 75
It provides job opportunities 0 0 1 12.5 0 0 4 50 3 37.5
It provides practical base for academic 0 0 1 12.5 0 0 5 62.5 3 37.5
institutions
Factors that create challenges for the practices of ownership transfer
The absences of well-organized market for share
trading tending to frustrate the existing
shareholders and discouraging the new 0 0 0 0 2 25 3 37.5 3 37.5
shareholders to get into share company
business.
The degree of stability, peace and internal
security of a country 0 0 0 0 0 0 6 75 2 25

Inadequate laws and regulations 0 0 2 25 2 25 4 50 0 0

Low democratic accountability, corruption and 0 0 3 37.5 3 37.5 0 0 2 25
bureaucratic quality
Absences of the legal framework 0 0 5 62.5 2 25 1 12.5 0 0
Lack of clarity, lack of understandable, and 0 0 4 50 3 37.5 1 12.5 0 0
inconsistent with relevant laws and regulations
Absence of articulated legal basis for its 0 0 3 37.5 5 62.5 0 0 0 0
activities to relevant authorities and
participants
Lack of clear rules, procedures, and contracts 0 0 7 87.5 0 0 1 12.5 0 0
those are enforceable in all relevant
jurisdictions
Lack of good regulation and supervision that
provides protection investor from (the
potentially opportunistic behavior of insiders)
solves agency problems and information 0 0 0 0 3 37.5 4 50 1 12.5
asymmetry arising from inside information.
Deficient corporate governance will affect the
willingness to invest negatively 0 0 0 0 2 25 6 75 0 0

The public authority is responsible for

securities regulation to protect investors and
the economy from malpractice 0 0 0 0 0 0 3 37.5 5 62.5
 Girma Gudde Jote / African Journal of Commercial studies. 3(3) (2023) 135-149 Page147 of 149

Inappropriate applications of internationally

acceptable accounting and auditing standards 0 0 5 62.5 3 37.5 0 0 0 0

Increase the cost of living due to high rates of

inflation 0 0 0 0 0 0 6 75 2 25

Low income and saving capacity of individuals

0 0 0 0 0 0 7 87.5 1 12.5

Low domestic investments and productions

0 0 0 0 0 0 6 75 2 25

Insufficient technological infrastructure such as

ICT 0 0 0 0 2 25 6 75 0 0

Lack of competent experts in the financial

sector 0 0 2 25 2 25 4 50 0 0

Limited number of companies in the industry

0 0 5 62.5 3 37.5 0 0 0 0

Absence of the proper institutions that could

facilitate the trade 0 0 0 0 0 0 7 75 1 25

Low level of public awareness and trust about

stock markets 0 0 3 37.5 0 0 0 0 5 62.5

Poverty reduction goal of the country 0 0 3 37.5 0 0 0 0 5 62.5

Increasing in the size and number of Share 0 0 0 0 2 25 0 0 6 75
Companies
The increasing in number of experts 0 0 0 0 3 37.5 1 12.5 4 50
Development in banking and other financial 0 0 0 0 0 0 7 87.5 1 12.5
sector in a country.
Current economic development and growth 0 0 0 0 0 0 3 37.5 5 62.5
Increase in the rate of domestic savings 0 0 0 0 0 0 2 25 6 75
Increasing in number and quality of higher 0 0 0 0 5 62.5 3 37.5 0 0
education institutions which generate experts
Increase of foreign investment in the nation 0 0 0 0 5 62.5 0 0 3 37.5
specially investment in industrial parks
Inflow of nation’s citizens who were abroad 0 0 0 0 5 62.5 0 0 3 37.5
The nation’s foreign relations and policies 0 0 0 0 2 25 0 0 6 75
Source: Survey result, 2022

APPENDIX II: The need for stock market in Ethiopia

Strongly disagree Neutral Agree Strongly

2. The need for stock market in Ethiopia disagree Agree
No. % No. % No. % No. % No. %
It contributes to the economic growth of the 6 7.14 0 0 12 14.28 34 40.4 32 38
country 7
It helps to easily sell and buy shares 0 0 10 0 12 14.28 50 59.5 12 14.2
8
The securities market can fill the gap of bank
loans which require huge collaterals 0 0 6 7.14 8 9.5 52 61.9 18 21.4
2
The securities market creates alternative
channels for saving and investment 4 4.76 4 4.76 2 2.38 38 36
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45.2 42.8
3 5
It serve as an alternate source of finance 0 0 0 0 6 7.14 44 52.3 34 40.4
8 7
It helps to attract more domestic and foreign 0 0 8 9.5 2 2.38 34 40.4 20 23.8
investors 7
The security market facilitates ongoing and
future privatization goal of the country 6 7.14 8 9.5 8 9.5 36 42.8 26 30.9
5 5
Promote efficient financial system 0 0 6 7.14 10 11.9 48 57.1 20 23.8
4
Allow de-concentration of ownership 4 4.76 8 9.52 4 4.76 38 45.2 30 35.7
3
Improve accounting and auditing standards 4 4.76 6 7.14 12 14.28 38 45.2 24 28.5
3 7
Provide effective tools for monetary and fiscal 2 2.38 10 11.9 10 11.9 38 45.2 22 26.1
policy 3 9
Factors that creates challenges for the practices of ownership transfer
The absences of well-organized market for share
trading tending to frustrate the existing
shareholders and discouraging the new 8 9.5 16 19 8 9.5 40 47.6 16 19
shareholders to get into share company
business.
The degree of stability, peace and internal 6 7.1 6 7.1 10 11.9 44 52.4 18 21.4
security of a country
Inadequate laws and regulations 6 7.1 12 14.3 12 14.3 32 38 22 26.2
Low democratic accountability, corruption and 4 4.7 8 9.5 10 11.9 38 45.2 4 4.7
bureaucratic quality
Lack of good regulation and supervision that
provides protection investor from (the
potentially opportunistic behavior of insiders)
solves agency problems and information 14 16.6 6 7.1 4 4.7 48 57.1 12 14.3
asymmetry arising from inside information. 4
Deficient corporate governance will affect the
willingness to invest negatively 6 7.1 0 0 10 11.9 48 57.1 20 23.8
4
The public authority is responsible for
securities regulation to protect investors and 8 9.5 8 9.5 10 11.9 44 52.3 14 16.6
the economy from malpractice 8 7
Inappropriate applications of internationally
acceptable accounting and auditing standards 8 9.5 2 2.3 10 11.9 48 57.1 16 19
4
Increase the cost of living due to high rates of 6 7.1 2 2.3 12 14.2 46 54.7 18 21.4
inflation
Low income and saving capacity of individuals 16 19 4 4.7 6 7.1 44 52.3 14 16.6
8 7
Low domestic investments and productions 10 11.9 4 4.7 10 11.9 44 52.3 16 19
8
Insufficient technological infrastructure such as 8 9.5 4 4.7 12 14.3 40 47.6 20 23.8
ICT
Lack of competent experts in the financial 6 7.1 18 21.4 14 16.6 32 38 14 16.6
sector
Limited number of companies in the industry 8 9.5 22 26.2 12 14.3 34 40.5 8 9.5
Absence of the proper institutions that could 8 9.5 10 11.9 10 11.9 40 47.6 16 19
facilitate the trade
Low level of public awareness and trust about 12 14.2 14 16.6 12 14.3 42 50 4 4.7
stock markets
Poverty reduction goal of the country 10 11.9 6 7.1 8 9.5 42 50 18 21.4
Increasing in the size and number of Share 2 2.3 12 14.3 8 9.5 42 50 20 23.8
Companies
The increasing in number of experts 4 4.7 14 16.6 6 7.14 40 47.6 18 21.4
Development in banking and other financial 4 4.7 6 7.1 2 2.3 54 64.3 18 21.4
sector in a country.
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Current economic development and growth 12 14.3 6 7.1 6 7.14 46 54.7 20 23.8
6
Increase of foreign investment in the nation
14 16.6 4 4.7 4 4.7 42 50 20 23.8
Inflow of nation’s citizens who were abroad 8 9.5 8 9.5 2 2.3 42 50 24 28.5
The nation’s foreign relations and policies 4 4.7 14 16.6 4 4.7 40 47.6 22 26.2
It contributes to the economic growth of the 6 7.14 0 0 12 14.28 34 40.4 32 38
country 7
Survey result, 2022

Cite this article as: Girma Gudde Jote (2023). Corporate Ownership transfer: The role of stock
market in Ethiopia. Africa Journal of Commercial Studies. 3(3),135-149. doi:
10.59413/ajocs/v3.i3.1