Short-term financing decisions and financial performance of non-financial firms listed at the Nairobi Securities Exchange, Kenya
Makori, Mogaka Daniel
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The existing literature links poor financial performance among non-financial listed firms in Kenya to long-term funding conduct of these firms. However, as important as longterm financing decisions are, they are made less frequently, while the day-to-day decisions involving the management of short-term financing components consume tremendous amounts of management time. Poor short-term financing decisions impair the firm’s ability to remain operating. This study therefore investigates the effect of shortterm financing decisions on financial performance of non-financial firms listed at the Nairobi Securities Exchange, Kenya. This thesis also seeks to determine the interaction effect of short-term financing on the financial performance of non-financial firms listed at the NSE. The study further investigates the moderating effect of firm characteristics namely firm size, growth opportunities and financial leverage on the relationship between short-term financial decisions and financial performance of non-financial firms listed at the NSE. In order to provide a holistic solution, the study evaluates the mediating role of cash holdings on the relationship between short-term financing decisions and financial performance of non-financial firms listed at the NSE. The research employs explanatory research design, which is non-experimental in nature. The study has adopted a census of 26 non-financial firms listed at the NSE. The study uses panel data extracted from the annual reports and financial statements of non-financial firms obtained from the NSE handbooks, Capital Markets Authority library, and company websites for the period 2001-2014. The study has applied panel data models (random and fixed effects) on the basis on the results the of Hausman specification test. The mediating effect of cash holdings has been tested using the step-wise regression technique by employing a fourstep approach by Baron and Kenny (1986). In addition, the study has used Modified Wald and Wooldridge tests to test for heteroscedasticity and serial correlation respectively. Moreover, the study has performed Bera and Jarque and Fisher-type tests to test for normality and unit root in panel data respectively while the study has tested the presence of multicollinearity by the Variance Inflation Factor test. Finally, the study has used Feasible Generalized Least Squares to approximate the regression model owing to the presence of heteroskedasticity problem. The FGLS regression results reveal that inventory turnover decisions have positive effect on financial performance measures. However, only the relationship between inventory turnover decisions and return on assets is significant. The study also establishes that accounts receivable turnover decisions are have significant negative effect on all financial performance measures while accounts payable turnover decisions have significant positive effect on all financial performance measures. The study further determines that cash holding has significant mediating effect on the relationship between short-term financing decisions and financial performance of non-financial firms listed at the NSE. Additionally, the study finds that the interaction between the short-term financing decision components had a significant effect on financial performance. Finally, the study determined that the relationship between shortterm financing decisions and financial performance when using return on assets and Tobin-Q is moderated by firm characteristics. The study, therefore, recommends that managers of non-financial listed firms at NSE should lessen the accounts receivable period to a sensible minimum in order to generate worth for their shareholders; and increasing inventory holding and accounts receivable periods to reasonable levels. This study further recommends that managers should maintain an optimal cash ratio. Finally, the study recommends that the policy makers of should consider the firm characteristics such as the size of the firm, leverage and growth opportunities affect short-term financing decisions which in turn affects firms’ performance.