Working Capital Efficiency and Firm Value of Selected Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

Firm value of listed firms remains integral to shareholders and other stakeholders since it has a bearing on investor returns. In Kenya, development plans have been made by the Capital Markets Authority such as development of 2014-2023 master plan. However, statistical evidence indicates that value of firms listed at NSE has been declining over the past years as indicated by the price to book value ratio. Empirical evidence indicates that working capital efficiency is key in explaining firm value. The listed firms have invested in working capital though evidence indicates that firm value has continued to decline due to inefficient working capital practices. This continues to be a concern for empirical research in Kenya owing to inadequate convincing evidence describing the nature of the relationship. In view of this, the study sought to assess the effect of working capital efficiency on firm value of selected firms listed at Nairobi Securities Exchange, Kenya. The study further assessed the mediating effect of liquidity and moderating effect of firm size on the relationship between working capital efficiency and firm value of selected firms listed at Nairobi Securities Exchange, Kenya respectively. Additionally, the study sought to establish the joint effect of working capital efficiency, liquidity and firm size on firm value of selected firms listed at Nairobi Securities Exchange, Kenya. The study was anchored on agency theory, cash conversion cycle theory, pecking order theory and trade-off theory. The philosophical underpinning of the study was the positivism paradigm in addition to Explanatory research design. A census of 41 firms formed the target population. A document review guide was used to collect secondary data that was obtained from the NSE handbooks and audited financial statements of the firms. Data was analyzed using descriptive statistics, trend analysis, Pearson correlation analysis, and panel regression analysis. Hypothesis testing was at 0.05 significance level. Preliminary statistical tests including normality, heteroscedasticity, autocorrelation, stationarity and model specification tests were done and ethical considerations were adhered to. Random effects model was adopted to estimate the panel data regression analysis. The study found a positive and statistically significant effect of working capital efficiency on firm value; liquidity had a positive and statistically significant full mediating effect on the relationship between working capital efficiency and firm value; and the study established a negative and statistically significant moderating effect of firm size on the relationship between working capital efficiency and firm value. Further, the study found a statistically significant joint effect of working capital efficiency, liquidity and firm size on firm value. Hence the study recommends the developing of working capital and liquidity policies for selected listed firms in order to enhance efficiency and optimal levels across sectors in consideration of nature and size of firms. In relation to practice, firm managers have a role of ensuring efficiency of the key components of working capital such as adopting just-in stock systems, restructuring receivables processes, and developing proper frameworks that could nurture their relationship with suppliers and not at the expense of the firm. In view of finance theory, the study recommends the need to broaden the scope of knowledge into aspects of more practical and innovative techniques that stakeholders and firms can adopt in order to increase working capital efficiency and positively affect firm value.