Relationship between trade credit and value of firms listed at the Nairobi Securities Exchange

Abstract

Trade Credit can be applied by firms to increase sales volumes and thus profitability. However, it can lead to liquidity problems if not efficiently managed. The purpose of this study was to establish the relationship between trade credit and value of firms listed at the Nairobi Securities exchange. Panel secondary data was collected from published Financial statements at Nairobi Securities Exchange and Capital Markets Authority for period between 2009 to 2012. The study used descriptive correlation research design on a sample of 39 Non-Financial Firms listed at the Nairobi Securities Exchange to study the relationship between the two Variables. Regression Analysis was used to determine the relationship and found an inverse and insignificant relationship between the investment in accounts recievables and the Value of Firm.This implies that the increase in profits as a result of trade credit use in boostering sales is later Negated by the associated Trade Credit risks and costs and therefore the Negative effect to value of Firm. This further confirms that accounts recievables entail both costs and confer benefits.The study established that Size of firm and Leverage greatly influenced the Value of Firm and Commented on the neeed by investors to pressure their firms to limit trade credit granted so as to mitigate the opportunity cost, financial risk, and reduction in profitability and liquidity while also encouraging managers to maintain an investment in accounts receivable which maximizes operational, financial, and commercial benefits.