The Effect of Liquidity on Financial Performance of Agricultural Companies Listed at the Nairobi Securities Exchange

Abstract

The objective of the study was to determine how and the extent to which agricultural firms listed at the Nairobi Stock Exchange (NSE) are impacted by liquidity. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavored to examine the range of magnitude and effects of liquidity on firm perforamnce. This study adopted an exploratory research design combining both descriptive and causal types of analysis. It was a longitudinal research with the scope being a case study of all the seven listed agricultural firms at the NSE. The target population was the seven listed firms NSE. Secondary sources of data were employed, and data was collected on; profit after tax, total assets, current assets and liabilities, inventory, prepayments, cost of sales, firm size, long-term debt, and total shareholders‟ funds. The unit period of analysis was annually, and data was collected for the period from January 2008 to December 2017. The study applied correlation analysis, and linear regression with the technique of estimation being Ordinary Least Squares (OLS) so as to establish the relationship of liquidity and firm performance. The study determined that there is a significant positive relationship between liquidity and performance of firms quoted in the NSE. A unit increase in the quick ratio variable imdicating liquidity would lead to a 0.271 increase in the firm performance. However, this happens after the introduction of the control variables; inventory turnover and firm size. These act as moderating variables because they affect the strength of the relationship between liquidity and firm performance. The study concluded that increase in liquidity can lead to enhanced firm performance in presence of the moderating variables, inventory turnover and firm size. The study recommended that; the government through its various arms can formulate rules, regulations and policy that revitalize financial performance of agricultural firms which can boost the overall economy, and the management of agricultural firms can adjust their liquidity so that it promotes their company‟s financial performance.