The Effect of Corporate Governance on Working Capital of Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

Effective corporate governance practices in an organization ensure that its resources are managed in a manner that will lead to a better performance. The management of working capital is such a resource that effective corporate governance has an effect since when a business does not manage its liquidity well; it will have cash shortages and as a result experience problems paying its obligations when they fall due. Towards this end, the research sought to examine the effect of corporate governance on the working capital management efficiency of manufacturing firms listed at the Nairobi securities exchange. This study adopted a co-relational research design. The firms that were analyzed after the screening process finally became 15 of which their financial statements for the period 2008-2012 were studied. A regression model was determined to establish the relationship between various working capital parameters and the corporate governance practices. The control variables that were used included the firm size and sales growth. The results of the study show that adoption of corporate governance practices plays an important role in improving the efficiency of working capital management. By the study adopting a co-relational design and not necessarily a causal relationship between the two, this finding may only be generalized to firms similar to those that were included in this research. This study contributes to the literature on the factors that improve the efficiency of working capital management, and in particular on the association between several features of corporate governance and the efficiency of working capital management. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders.