Effect of Working Capital Management on Firm Value of Companies Listed at the Nairobi Security Exchange, Kenya

Abstract

Proper managing of working capital enhances the value of the shareholders. Indeed, the key cause for the failure of most firms, partnerships and small firms is poor working capital management, which entails inventory, receivables, and payables management. The objective of this research is to establish the effect of working capital management on firm value of firms listed at the Nairobi Securities Exchange, Kenya. 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 the working capital management on corporate value. The target population was all the listed firms at the Nairobi Securities Exchange. Secondary sources of data were employed. Panel data was utilized, data was collected for several units of analysis over a varying time periods. The research employed inferential statistics, which included correlation analysis and panel multiple linear regression equation with the technique of estimation being Ordinary Least Squares (OLS) and so as to establish the relationship of the working capital management and corporate value while incorporating the control effect of firm size, leverage, and sales growth. The study findings were that average collection period, average payment period, firm size, and leverage are negatively significantly associated with firm value. Additionally study findings revealed that the various working capital management practices, firm size, leverage, and sales significantly influenced firm value and they can be utilized to significantly predict firm value. The final study finding was that only firm size had a significant relationship with firm value, t has a significant negative influence on firm value. Policy recommendations were made to the CMA and NSE, and by extension, the National Treasury, to formulate and enforce rules and regulations on working capital management since it has been established that it influences the value of quoted firms. Further recommendations were made to firm management and consultants to implement working capital management in order to boost firm value. Additional recommendations were made to other capital markets’ stakeholders like investment banks, equity analysts, and individual investors to search for firms with good working capital management to invest or recommend to invest. Final recommendations were made to firm management and consultants not to concentrate on any one WCM component in isolation but to employ wholesomely good working capital management practices.