The Relationship Between Working Capital Management and Total Shareholder Return of Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

Working capital Management plays an integral part in the day to day running of any firm. This is because working capital represents the liquidity of a firm. Liquidity is the life line of a business entity and for it to survive it needs to meet its short-term obligations as an when they fall due. Proper management of working capital ensures that manufacturing companies survive in the ever changing and complex business environment in Kenya. This ensures that shareholders returns are maximized hence achieving firms’ goals of maximizing shareholders wealth. This study looks at the relationship between working capital management and total shareholder return of manufacturing and allied firms listed at the Nairobi Securities Exchange. In the study working capital is measured by the cash conversion cycle and there are two control variables namely firm size and risk. The research used secondary data collected from the Nairobi Securities Exchange and annual reports published by the firms. Descriptive analysis and inferential analysis were used to analyse data from eight out of the nine firms listed under the manufacturing and allied sector of the securities exchange. In the descriptive analysis a negative correlation coefficient of -0.01 was found between total shareholder return and the cash conversion cycle. In addition, a positive correlation was found between the firm size which was measured by the natural logarithm of total sales and risk measured by the debt equity ratio. Hence, the study recommends that firms should reduce the cash conversion cycle through efficient management of components of working capital which are receivable, payables and components in order to increase the total shareholder return thus achieving the shareholders wealth maximization objective.