Effect of Liquidity Management on Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

A company's ability to rapidly fulfill its short-term commitments thanks to adequate liquidity lowers the danger of default and financial difficulties. Additionally, it offers the flexibility to fund strategic projects and take advantage of advantageous investment opportunities, which supports long-term development and profitability. Effective liquidity management may also minimize borrowing costs, boost creditworthiness, and lessen the need for expensive external funding, all of which have a favorable influence on the firm's overall financial health. The objective of this study was to determine the effect of liquidity management on financial performance of firms listed at the NSE. This study was anchored on trade-off theory and supported by free cash flow theory, and agency theory. The research employed a descriptive approach, relying on secondary data extracted from annual financial reports spanning from 2018 to 2022. The target population comprises the entire spectrum of firms listed at the NSE, with a final dataset of 270 observations from 54 firms providing a complete dataset. Descriptive statistics, correlation analysis, and regression analysis form the core of the methodology, offering a multifaceted examination of the relationships between the variables. The model summary and analysis of variance tables indicated that the regression model was collectively significant in explaining the variance in ROA, with an R Square value of 0.368. Liquidity management emerged as a highly significant predictor, with a positive coefficient of 0.519, reinforcing its importance in influencing financial performance. Managerial efficiency also demonstrated a significant positive impact on ROA, with a coefficient of 0.229. On the other hand, firm size did not exhibit a statistically significant relationship with ROA. The study concludes that liquidity management and managerial efficiency play pivotal roles in influencing financial performance among NSE-listed firms. Firms with effective liquidity management strategies and efficient managerial practices tend to experience higher ROA. However, the study does not find a significant relationship between firm size and financial performance. Recommendations for policymakers include incorporating guidelines and incentives within the regulatory framework to encourage firms to adopt effective liquidity management practices. Policymakers might also consider educational initiatives to enhance financial literacy regarding the significance of liquidity management. Further research could explore the moderating effects of industry-specific characteristics, incorporate longitudinal dimensions for a more dynamic analysis, and investigate mediating variables that were not considered in this study.