Firm Characteristics and Financing of Working Capital Requirement in Organizations: A Case of Non-Financial Firms Listed At the Nairobi Securities Exchange (NSE)
Abstract
Decisions on financing of working capital requirement are very important because of their impact on profitability and liquidity of a firm. The firm therefore has to maintain an optimal strategy for financing working capital requirement that will enable it to maximize its value. The optimal strategy varies across firms and it depends on firm characteristics. The main aim of this study was to investigate the relationship between firm characteristics and financing of working capital requirement of non-financial firms listed at the Nairobi Securities Exchange. The specific objectives were to establish the effect of firm size, profitability, current assets and sales growth on financing of working capital requirement of non-financial firms listed at the Nairobi Securities Exchange. The study adopted a panel research design. The target population was 38 Nairobi Securities Exchange listed non-financial firms as at 31st December 2016 and 27 of these firms formed the accessible population for this study. The sample consisted of all the members of the accessible population and the sample period was from 2010-2016. Secondary data extracted from the published annual financial statements were used to compute the relevant measures of the variables and the data was analyzed using Eviews software. Panel diagnostics tests were done on the data to test for normality, stationarity, multicollinearity and to determine whether to adopt a fixed effects or a random effects panel regression model. Based on the results of the diagnostic tests, a fixed effects panel regression model was used to estimate the effect of explanatory variables on the dependent variable at 5% significance level. From the results of the estimation model, firm size was found to have a positive and significant effect on the financing of working capital requirement of non-financial firms listed at the Nairobi Securities Exchange while profitability and current assets had a significant and a negative effect. The results also established that the relationship between sales growth and financing of working capital requirement of Nairobi Securities Exchange listed non-financial firms was positive and insignificant. From the findings, it was concluded that firm size, profitability and current assets have a significant impact on financing of working capital requirement of non-financial firms listed at the Nairobi Securities Exchange. The study therefore recommends that as Nairobi Securities Exchange listed non-financial firms increase in size, they should use more short-term debt to finance their working capital requirement. It is also recommended that highly profitable firms and those with huge amounts of current assets in their asset structure should use less short-term debt to finance their working capital requirement. Finally, Nairobi Securities Exchange listed non-financial firms do not need to consider sales growth as an important factor when making decisions on financing of working capital requirement. The results of this study will assist firms in making decisions on the optimal working capital requirement financing strategy that maximizes the value of the firm.
Keywords: Firm Size, Profitability, Current Assets, Sales Growth, Financing Of WCR, Non-Financial Firms, NSE
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