Working Capital Financing, Financial Flexibility and Financial Performance of Non-financial Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

Working Capital is central to daily operations of every business. Working Capital Financing adopted by a firm take either Aggressive (where ratio is above 0.5) or Conservative (where ratio as below 0.5). The study explored effect of Working Capital Financing plus financial flexibility on financial performance of non-financial entities quoted at Nairobi Securities Exchange, Kenya. First study objective was to establish link of Working Capital Financing with financial performance of non-financial entities quoted at Nairobi Securities Exchange. Second study objective was to determine moderating impact of financial flexibility on linkage of Working Capital Financing with financial performance of non-financial entities quoted at Nairobi Securities Exchange. Study was anchored mainly on Risk Return Trade-off Theory supported by Resource based Theory plus Agency Theory. Study adopted correlation research design. The Secondary panel data for 31 non-financial entities were gathered for five years, resulting in 155 firm-year end observations. The data were analyzed by descriptive statistics, Pearson correlation, panel data regression to ascertained linkage of Working Capital Financing with entity Return on Asset and hierarchical multiple regression determined the moderating influence of financial flexibility on linkage of Working Capital Financing with entity financial performance. Study established negative significant linkage of Working Capital Financing with Return on Asset. Study further established negative and significant moderating influence of the financial flexibility on linkage of Working Capital Financing with entity Return on Asset. Study concluded that smaller portion of short-term debt improve entity performance as greater levels of short-term debt reduces firm performance. Similarly, study concludes that firms should consider short-term external financial flexibility without affecting firm performance and consider internal financial flexibility that might present extra benefit to an entity to lessen adverse effect of hazardous WCF on firm financial performance by mitigating hitches of underinvestment plus diminishes cost of financial misery due to resource constraint.