Impact of Trade Credit on the Value of Commercial and Services Firms Listed at the Nairobi Securities Exchange

Abstract

Business entities have a financial purpose of maximizing the value of the firm together with the shareholder’s wealth (Berle & Means, 1932). Trade credit (receivables) supports firms to advance this objective or purpose by enhancing the level of accounts receivables, hence affecting the revenue, profitability together with the liquidity of the firm. In turn, this affects the market value of the firm’s equity and assets. Nadiri (1969) stated that trade credit is costly with an opportunity cost and also bears credit risk, because of the payment default exposure. Therefore, giving trade credit may lead to a negative effect on the profitability and the liquidity as a result of debt defaults. This study sought to determine the effect of trade credit on value of commercial and services firms listed at the NSE. The independent variables were trade credit as measured by account receivable turnover ratio, assets of the firm as measured by total asset turnover ratio and capital structure as measured by debt to equity ratio. Firm value was the dependent variable which the study sought to explain and it was measured by enterprise multiplier and Tobin Q. Secondary data was collected for a period of 5 years (2012 to 2016) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced adjusted R-square value of 0.210 which means that about 21 percent of the variation in value of commercial and services firms listed at the NSE as measured by Tobin Q can be explained by the three selected independent variables while 79 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with value of commercial and services firms listed at the NSE (R=0.521). The results further revealed that individually, trade credit and assets of the firm are statistically significant determinants of value of commercial and services firms listed at the NSE while capital structure is an insignificant determinant. The overall model was found to be not significant when firm value was measured using enterprise multiplier. This study recommends that policy makers should establish measures that will ensure an increase in trade credit that will improve firm value without exposing the firm to risks associated with trade credit. These measures could include establishing efficient trade credit policies, trade credit departments, credit management policies and procedures and also taking trade credit insurance policies. The researcher proposes that further studies be conducted on all commercial and service firms in Kenya or on all listed firms in Kenya.