Short-term financing decisions and financial performance of non-financial firms listed at the Nairobi Securities Exchange, Kenya
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Date
2017-05
Authors
Makori, Mogaka Daniel
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
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.
Description
A thesis submitted to the school of business in partial fulfillment of the requirement for the award of the Degree of Doctor of Philosophy in Finance of Kenyatta University. May 2017