A study of the relationship between liquidity ratios and share performance of companies listed on the Nairobi Stock Exchange
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Date
2008Author
Munyasya, Anthony N
Type
ThesisLanguage
enMetadata
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Share performance is determined by the positive increases in prices together with the
dividend distributions during the period. The classical economic view posits that the
current price of a stock closely reflects the present value of its future cash flows (Kumar
and Charles, 2006). According to this view, the correlations in the returns of two assets
arise from correlations in the changes in the assets' fundamental values, with demand
shocks or shifts in investor sentiment playing no role because the actions of arbitrageurs
readily offset such shocks. This indicates that liquidity ratios may have an impact on
share prices as they are likely to affect the organization's fundamental asset values.
This paper thus sought to determine the extent to which firm liquidity affects the share
prices of the listed firms. To document the return patterns as well as obtain residuals for
hypothesis testing, financial ratio data to measure liquidity was computed from published
reports of the quoted companies for the years 1997 to 1999 while to measure share
performance the share prices were obtained from NSE trades. An empirical study was
conducted using NSE listed firms as the population.
The findings of the study were that share prices were adversely affected by a decline in
firm liquidity. The results indicated that there exists a general association between the
firm's current ratio and quick ratio and its stock return, but the association is structurally
unstable. It was noted that from 1997 to 1999 the means of the share returns of the firms
declined with a reduction in the liquidity levels of the firms.
Citation
MBASponsorhip
University of NairobiPublisher
University of Nairobi School of Business, College of Humanities and Social Sciences