Financial Management Decisions and Firm Value of Selected Firms Listed at Nairobi Securities Exchange, Kenya
Gitagia, Francis K.
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The declining and highly volatile firm value observed in the Nairobi Securities Exchange (NSE) over the last decade has raised concern among scholars and financial practitioners. The Kenyan securities market has undergone periods of decline in firm value as shown by reduction in market capitalization from a high of 6161 points in year 2007 to a low of 2789.64 points in year 2016. Firm’s financial management decisions have long been linked with firm value; However, there has not been a consensus amongst empirical studies on the effect of financial management decision variables including capital structure, dividend, Cash holding and corporate investment on firm value. The study sought to determine the effect of financial management decisions on firm value of selected firms listed at Nairobi Securities Exchange. The specific objectives were: to determine the effect of capital structure decisions, dividend decisions, cash holding decisions, and corporate investment decisions on firm value of selected firms listed at the NSE, Kenya. The study further assessed the moderating effect of Gross Domestic Product and political risk on the relationship between financial management decisions and firm value. The study was anchored on: Shareholder value theory, pecking order theory, Signaling theory and trade-off theory. A census of 46 firms was carried out. The study utilized secondary data from financial reports obtained from NSE handbooks and Kenya National Bureau of Statistics for the period between 2008-2016. Data was analyzed using descriptive statistics. The study found that capital structure, dividend decisions and corporate investment had a positive and statistically significant effect on firm value. On contrary, cash holding was found to have a statistically significant negative effect on firm value. Whisman test of moderation further indicated that GDP had significant positive moderation effect on the relationship between each of the financial management decision and the firm value. On contrary, political risk was found to have a significant negative moderation effect on the relationship between capital structure, dividend decisions and corporate investment and the firm value. Further, political risk had insignificant negative moderating effect on the relationship between cash holding and firm value. The study concluded that firms with high debt levels relative to equity, pays dividends and increases corporate investment has high value whereas those with high cash holding have low firm value. Consequently, the study recommended that, corporate managers issue more corporate debt, increase the dividend payout, reduce free cash flows and increase corporate investments. It further recommended that the government reduce taxation on corporate bond interest, introduce interventions to reduce corporate cost of debt (through CBK), and increase capital allowances to encourage investments in long term assets. Additionally, NSE to work with other securities exchange to harmonize regulations to enable cross listing while CMA comes up with regulations regarding stock buybacks.