LIQUIDITY RISK AND FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS LISTED AT NAIROBI SECURITIES EXCHANGE
LIQUIDITY RISK AND FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS LISTED AT NAIROBI SECURITIES EXCHANGE
Fridah Wanjiru Kinyua - Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Wafula Fredrick (PhD) - Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
Financial performances have a common goal of generating income and increasing profits in firms. However, financial performance is coupled with likelihoods of occurrence of losses relative to the expected investment return. The general objective was to establish the effect of liquidity risk on financial performance of Manufacturing Firms listed at Nairobi Securities Exchange. The research examined how financial performance is affected by asset tangibility, capital adequacy, inflation and financial leverage. The study was underpinned by Pecking Order Theory, Organizational Portfolio Theory, Stewardship Theory and trade off theory of liquidity. This study adopted both descriptive research design. The target population in this study was NSE listed manufacturing firms in Kenya. This study relied on secondary data that was obtained from the annual audited financial statements. Data was collected through secondary data captured on Microsoft Excel sheets and then imported to STATA statistical packages for analysis. Since data is both cross sectional and time series, the study used panel regression analysis. Descriptive statistics such as mean score, standard deviation, skewness and kurtosis were estimated for all the variables and information was presented inform of tables and graphs. In order to test the relationship between the variables the inferential tests including the regression analysis were used. The study found that asset tangibility (β=0.595, P-value=0.022), capital adequacy (β=0.658, P-value = 0.000), inflation rate (β=0.603, P-value=0.015) and financial leverage (β=0.721, P-value=0.000) had positive and significant effects on the financial performance of Manufacturing Firms listed at NSE. The study concluded that financial leverage had the greatest effect on the financial performance of manufacturing firms listed at NSE, followed by capital adequacy, then inflation rate while asset tangibility/quality had the least effect on the financial performance of manufacturing firms listed at NSE. The study recommended that the management of the manufacturing firms should strive to achieve and maintain an optimal liquidity position that holds adequate cash/liquid resources for operational needs while the surplus liquid resources are invested in existing viable investment opportunities in the operating environment to enhance the growth. The study also recommends that manufacturing firms should enhance their financial leverage practices to ensure that they become more profitable hence survive in the market.
