EFFECT OF LIQUIDITY ON FINANCIAL PERFORMANCE OF LISTED FIRMS IN THE NAIROBI SECURITIES EXCHANGE
Abstract
Purpose of the study: The purpose of this study was to determine the effect of liquidity on financial performance of listed firms in the Nairobi securities exchange.
Problem statement: The Kenya government, together with companies and individuals in the private sectors, has put concerted efforts in ensuring the existence of a favorable environment for doing business in the country. Consequently, while some firms listed in the NSE have improved in performance, there are others that have experienced declining fortunes and some have even been delisted from the NSE over the last decade. Significant efforts to turn around such companies or even liquidate them have focused mainly on restructuring of firm level factors. However, managers and practitioners still lack adequate guidance for attaining optimal decision on firm level factors.
Study Methodology: The study employed panel research design that is non-experimental in nature. This study targeted all the 64 firms listed on the Nairobi Securities Exchange. A census of all the 64 firms listed in Nairobi Securities Exchange was used as a unit of analysis. Secondary data extracted from the financial statements was used to compute the relevant ratios and encompassed panel data. The study employed a dynamic panel data regression model while ANOVA was used to test the relationship between the variables across the sectors. Test of hypothesis was done at 95% confidence interval.
Results of the study: The study found out that there was a positive and significant relationship between liquidity and financial performance of financial and non-financial firms.
Conclusion: The study concluded that liquidity has a positive and significant effect on financial performance of Listed Firms in the Nairobi Securities Exchange. Liquidity plays a crucial role in the successful functioning of a business firm. Liquidity not only helps to ensure that a person or business always has a reliable supply of cash close at hand, but it is a powerful tool when it comes to determining the financial health of future investments as well
Recommendations: The study recommends the management on firms listed at the Nairobi Securities Exchange to focus on liquidity as it found to have a significant effect on the financial performance.
Keywords: Liquidity, Financial Performance & Nairobi Securities Exchange
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