Effects of Financing Decisions on Total Productivity of Non-Financial Firms Listed at the Nairobi Securities Exchange
Loading...
Date
2020
Authors
Nyachieo, Valerie Nyaboke
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The importance of a firm’s productivity cannot be overemphasised as it not
only results in the growth of firms but also contributes to the overall growth of
an economy. More than half of the variation in economic growth across
different countries is said to be explained by differences in total factor
productivity arising from the firm level. One major challenge facing
developing economies, including Kenya is extremely low productivity level at
the firm. Studies have pointed to innovation as a critical factor in determining
a firm’s productivity. However, investment in innovative activities such as
research and development are subject to the financial position of the firm,
which is dependent on financing decisions taken by firms’ management.
Financing decision could thus be a major underlying factor affecting firms’
productivity. However, the link between financing decisions and firms
productivity has been scarcely researched even though it could help in
informing financial policies that boost firms’ productivity. It is against this
backdrop that the study sought to explore the effect of financing decision on
the productivity of non-financial firms listed at the Nairobi Securities
Exchange. The study objectives were to measure the productivity of nonfinancial firms listed at the NSE and to determine the effect of leverage and
liquidity on the productivity of non-financial firms listed at the Nairobi
Securities Exchange. The study was anchored upon Solow residual growth
accounting theory where total factor productivity was obtained from the
residual of the production function. Secondary data with a panel of 34 nonfinancial firms listed at the Nairobi Securities Exchange covering the period
2008-2017 was retrieved from the Nairobi Securities Exchange library for
analysis. A panel regression model, was adopted with Feasible general least
squares used as the estimation technique after Hausman test was conducted.
Total factor productivity was then regressed against the firm’s leverage,
liquidity and other control variables such as size and industry. The average of
total factor productivity of non-financial firms listed at the NSE was found to
be 1.04, which is an indication of low productivity. Leverage was found to
have a significant positive effect on the productivity of non-financial firms
listed at the Nairobi Securities Exchange. Liquidity was determined to have a
significant positive effect on the productivity of non-financial firms listed at
the Nairobi Securities Exchange. The results obtained from the study showing
low productivity levels of firms is an implication that firms should move from
factor accumulation to factor effectiveness to boost their productivity. The
study results showing a positive effect of liquidity on productivity implied that
firms should adopt an aggressive working capital approach in financing its
productive activities. The positive effect of leverage on productivity implies
that debt is a good source of funding productive investment activities and
should be used more by the firm. Other implication of the study points to the
government, financial institution and capital markets contribution to firms’
productivity by availing more debt capital to firms to go towards investment in
productive activities.
Description
A Research Project Submitted to Department of
Economic Theory in the School Of Economics in
Partial Fulfillment of the Requirement for the
Award of the Degree of Master in Economics of
Kenyatta University
Keywords
Financing Decisions, Non-Financial Firms, Nairobi Securities Exchange