The Effect of the of Working Capital Management on the Shareholder's Value

Abstract

The purpose of this study was to establish effect of the of working capital management on the shareholder's value, case study being the Nairobi Stock Exchange. In particular, specific objectives were to evaluate the current assets and current liabilities (working capital) in each industry, and establish the effect of working capital on dividends and market share prices. This study addresses the research gap by previous studies that focused on how dividends affect the value of the firms, factors that affect dividends and market price per share other that levels of working capital, and effect of working capital on firms' profitability and liquidity but not on how it affects dividends and market share price. To address this gap, the study evaluates the extent to which current assets and current liabilities affect firms' dividends and market share price of their common stock. The target population was firm listed in the Nairobi Stock Exchange, apart from all firms in the Finance and Investment industry. This is because financial statement for firms (mainly banks) in this industry does not distinguish between current assets and current liabilities from non-current ones. 32 firms were randomly sampled, this being 80% of the population. The findings of this study show that the level of current assets and current liabilities vary between industries. Further, with 95% confidence, the findings support the alternative hypothesis that the level of Current assets and liabilities as well as MPS and Dividepd Payout Ratios differs significantly between industries. This is because the Z values are not within the range of positive and negative 1.96. The study has revealed that the effect of levels of current assets and current liabilities vary between industries. In agricultural sector, increase in levels of current assets would have a negative effect on both the MPS but zero effect on Dividend Payout ratios. In commercial industry, increase in levels of current assets would have a positive effect on both the MPS but zero effect on Dividend Payout ratios. In the Industrial and Allied, the effect of levels of current assets on MPS is negligible, while that of current liabilities is negative. For the Alternative Investment Market, the effect of increase in levels of current assets is positive on MPS but negative on Dividend payout ratios, while dividend payout ratios are negatively affected by the increase in levels of current assets and current liabilities. It has been recommended that Finance Managers should focus of factors that affect shareholders' value other than just the levels of current assets and currents liabilities. This is because only very smallproportion of the changes in MPS and Dividend Payout ratios is affected by levels of current assets and current liabilities.