The relationship between working capital management and the value of companies quoted at the Nairobi Stock Exchange

Abstract

A substantial amount of assets is held by Kenyan firms as working capital and thus the way working capital is managed is of great importance since they have a direct significant impact on the value of the firm. The purpose of this study was to determine the relationship between working capital management and value of the firm‟s quoted in Nairobi Stock Exchange. The study used secondary data obtained from annual reports and audited financial statement of companies listed on the Nairobi Stock Exchange. A sample of 22 companies listed on the Nairobi Stock Exchange for a period of seven years from 2003 to 2009 was studied. The average stock price was used to measure the value of the firm. Working capital components; average collection period, inventory turnover in days, average payment period, and cash conversion cycle were used as independent variables. Current ratio, size of the firm, fixed financial assets to total assets ratio and debt ratio were used as control variables. A descriptive statistics analysis was conducted on all the variables to give the general behavior of the firms quoted at the Nairobi Stock Exchange with respect to working capital management and value. Pearson correlation coefficient analysis was also conducted to establish the relationship among the variables. The relationship between the dependent variable, value and the other variables was conducted using a general regression model. To establish whether each of the independent variables had any significant relationship with the dependent variable a regression model was conducted separately between the dependent variable and each of the independent variables alongside the control variables. The regression models indicated that there was some relationship between working capital management and the firm‟s value. Both F-test and the coefficient of determination of variance indicated this relationship where the adjusted R2 was 14% and F statistics had a value of 2.260. The y-intercept, β0 was not zero meaning that there are other determinants of value apart from working capital management component. The result of Pearson correlation indicated a negative relationship between average cash collection period, inventory turnover in days, cash conversion cycle and value of the firm. It further indicated a positive relationship between value of the firm and average payment period. This means that the managers can increase the value of their respective firms by handling correctly the cash conversion cycle and keeping each different component of working capital management at an optimal level. More specifically managers can increase value for their respective firms by reducing average cash collection period, inventory turnover period, cash conversion cycle and delaying payments to the suppliers.