EFFECT OF WORKING CAPITAL FINANCING ON SHAREHOLDER VALUE CREATION OF NON-FINANCIAL FIRMS QUOTED AT THE NAIROBI SECURITIES EXCHANGE
Abstract
Purpose of the Study: The main objective of this study was to determine the effect of working capital financing on shareholder value creation of non-financial firms quoted at the Nairobi Securities Exchange for the period 2008-2014. This study was underpinned on The Capital Asset Pricing Model (CAPM). The study used general and empirical models from previous studies as a basis for studying specific models which were modified to suit the current study. Working capital financing involves funding and managing current assets of companies. A sound working capital management is supported by two fundamental decisions; determination of the most desirable level of investment in current assets and appropriate mix of short-term financing used to support this investment. It is therefore important that Shareholder value creation and profit maximizing becomes the organization’s main objectives. Shareholder value creation focuses more on long term sustainability of returns and not just profitability. Rational investors expect good long term yield of their investment. Working capital financing play an imperative role in general performance of a company and shareholder value creation.
Statement of the Problem: There have been a number of firms facing financial crisis among them; Mumias Sugar Ltd, Uchumi Supermarkets Ltd and Kenya Airways Ltd. All these companies are quoted at the Nairobi Securities Exchange. Due to declining performance of these companies, share prices have been dropping and shareholders do not receive dividends.
Research Methodology: The study was guided by the positivism philosophy. The study employed explanatory design which is non-experimental. Census design was used as the number of non- financial firms at the time of the study was 40 companies. The data was gathered from NSE handbooks and CMA publications comprising of annual financial statements, income statements and accompanying notes. Ordinary Least Square regression analysis was conducted to examine the effect of working capital financing on shareholder value creation.
Results: The results revealed that working capital financing had a statistically significant positive effect on EVA. Feasible generalized least squares were used to estimate the model. Diagnostic tests were conducted to ensure non-violation of the assumptions of Classical Linear Regression Model. Among the tests conducted; includes panel unit root test, Autocorrelation and Homoskedasticity tests. Study model tests showed that, there was non-violation the assumptions and hence the model found fit for further analysis.
Conclusion: Working capital financing showed a positive and statistically significant effect on shareholder value creation among the firms quoted at the NSE, Kenya.
Recommendation: The study recommends that managers of quoted non-financial companies should strive and practice periodic shareholder value creation analysis for continuous assessment of growth process. The government through the CMA should come up with regulatory framework that guide firm listed in enacted dividend policies. Further it is recommended that shareholder value creation report is enforced as an additional statement published by the firms quoted at the NSE, Kenya.
Key Words: Working capital, Financing, Shareholder, Value Creation, Non-financial, Firms
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