The Effect of Short-term Financial Policy on Profitability of Energy and Petroleum Firms Listed on the Nairobi Securities Exchange

Abstract

The main objective of the study was to investigate the effects of short-term financial policies on profitability of energy and petroleum firms listed on the Nairobi Securities Exchange. A causal research design was used in this study. Data was analyzed using descriptive statistics to summarize the study variables. Financial performance measured by return on equity(ROE) was used as the dependent variable. Key independent variables were short-term investment and financing policies. Firm size and financial leverage were used as the control variables. All data analyses were done using IBM SPSS Statistics version 25. Descriptive analysis results showed that all the study variables had positive mean values. Full and partial correlation analysis and scatterplot matrix were used to investigate size and direction of the relationships of all the study variables. Correlation and scatterplot matrix results revealed that all the independent variables had linear relationship with the firms' profitability. Standard multiple regression procedure was conducted to investigate the effect of the mean of short-term financial policies, firm size and financial leverage on return of equity. Both correlation and multiple regression analysis revealed the presence of multicollinearity between the two the key independent variables. Multiple regression results revealed that the best model for data analysis for the studied firms had return on equity as dependent variable, mean of the shortterm financial policies as key independent variable, financial leverage and firm size as control variables. The regression results indicated that increase in one unit of mean shortterm financial policy improved the profitability of the firms by 94.1%. An increase in one unit of financial leverage improved the profitability of the firms by16.4%. An increase in one unit of firm size reduced the profitability of the firms by11.4%. All the independent variables made 45.9% contribution to firms profitability during the study period. The study made policy recommendation for Capital Markets Authority, financial regulators and finance professional organisations to improve financial reporting standards to enable effective data analysis by researchers and financial analysts. Recommendation for further study using the same topic but including data from unlisted firms and a longer period of study was made.