Effect of Liquidity Risk on Financial Performance of Manufacturing Firms Listed on the Nairobi Securities Exchange

Abstract

The manufacturing industry is one of the significant sectors of Kenya’s economic development. However, the manufacturing sector has witnessed a slow pace of industrial growth and weak performance by most of the enterprises that has derailed the contribution to Kenya’s economy. In recent years, companies quoted in the manufacturing segment at NSE have posted mixed outcomes. The majority of the quoted manufacturing companies’ market share reveals a drop in shares’ prices resulting in a reduction in the entities’ market capitalization. In addition, most companies, such as the Flame Tree Group and the Unga group have recorded very strong negative percentages for their ROA and ROE. This research sought to investigate how liquidity risk influences the financial performance of listed manufacturing firms at the NSE. The independent variable for the research was liquidity risk, measured as the ratio of current liabilities to current assets. Leverage, firm size, and management efficiency were the control variables, while the dependent variable was financial performance measured using ROA. The research was guided by Miller Orr theory, the Baumol cash management model, and the liquidity preference theory. The research made use of descriptive research design. The 9 Kenyan-listed manufacturing firms as at December 2021 served as the target population. The study utilized secondary data from CMA and individual firm’s annual reports for five years (2017-2021) on an annual basis. Descriptive, correlation, as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research results generated a 0.393 R square value implying that 39.3% of changes in listed manufacturing firms’ ROA can be described by the four variables chosen for this research. The multivariate regression analysis further revealed that individually, liquidity risk exhibited a negative effect on ROA of listed manufacturing firms as shown by (β=-0.283, p=0.042). Leverage possess a positive though not significant impact on ROA of listed manufacturing firms (β=0.112, p=0.522). Firm size unveiled a positive but not significant influence on ROA of Kenyan-listed manufacturing firms (β=0.210, p=0.122) while management efficiency exhibited a positive and significant influence on ROA of Kenyan-listed manufacturing firms (β=0.484, p=0.000) respectively. The research recommends the need for listed manufacturing firms to warrant that liquidity risk management policies are crafted based on appropriate strategies for performance enhancement. The policy developers like CMA ought to formulate policy guidelines to direct firms on ways to enhance the efficiency of management. The research recommends the need for further studies focusing on other listed firms at the NSE.