Effect of Working Capital Management on Value of Firms Listed at Nairobi Securities Exchange

Abstract

Effective management of working capital can significantly impact a company's financial value, affecting the revenue it receives and the cost of financing its current operations. The objective of this study was to analyze and establish the relationship between working capital management and value of listed firms at the Nairobi Securities Exchange (NSE). The dependent variable, firm value was measured using Tobin Q, while the predictor variable was working capital management measured by days sales outstanding, days inventory in hand, days payables and net trade cycle (NTC). The control variables were firm size, firm age, liquidity, sales growth and leverage. This study employed correlation research design. The design was suitable since suitable because it assesses the strength and direction of the association between variables. The researcher looked at 54 listed firms at the NSE excluding those that are delisted and those missing financial records during the study period 2018-2022. Pearson Correlation and regression analysis were used to examine the relationship between the study variables. The findings showed that there was a statistically significant relationship between working capital management and firm value at P < .05 level [(F (9, 269) = 14.430, P <.001)]. All the independent variables: accounts payable days, accounts receivable days, firm age, firm size, liquidity, leverage and sales growth had positive correlations within Tobin Q with an exception of days inventory turnover and NTC which were negatively correlated implying that an increase in days inventory turnover and NTC period had a negative effect on firm value. One study limitation was though there are 63 listed firms only 54 had the required data. Further studies should be conducted to explore the impact of working capital management (WCM) on firm value, extending the research beyond listed companies to include those from various industries and over an extended timeframe.