The relationship between liquidity management and stock market return: evidence from commercial banks

Abstract

Liquidity management which refers to the management of current assets and current liabilities plays an important role in the successful management of a firm. It is a concept that is receiving serious attention all over the world especially with the current financial situations and the state of the world economy. Research has established that liquidity is an important concept determinant of financial distress. If a firm does not manage its liquidity well its current assets may not meet its current liabilities. Hence the firm may not have external financing easily. The objective of this study was to investigate the relationship between liquidity management and stock market return of listed commercial banks in Kenya. This study adopted a quantitative research design and the researcher chose to study the commercial banks due to the availability and reliability of the data. This is because liquidity is very crucial for commercial banks and it’s monitored keenly by bank supervision department of CBK. The population of the study was all the 11 listed commercial banks in NSE. Nine banks were used for this study after excluding I & M bank since their data was not complete for five years because they were listed in 2012 and HFCK which is classified by CBK as a mortgage finance institution and its regulation is assumed to be different from other commercial banks. Secondary data was obtained from audited published financial statements, Central bank annual reports, NSE website and NSE data vendors. To estimate stock return information on opening and closing prices and dividends distribution throughout the year for five years between 2009 and 2013 was collected. Stock return represents percentage gains or loss of value of the stock when compared to some previous period and the capital gains. The same was done for liquidity component for the same period. SPSS version 16.0 was used for data analysis. The average liquidity and stock market return were compared for the period of five years under the study. Stock market return was regressed against liquidity management to acquire the coefficient of determination and asses the strength of the relationship. The finding of this study shows that there exists a negative relationship between stock market return and liquidity management of commercial banks in Kenya. Based on the correlation coefficients at 95% degrees of confidence, the study coefficients are found to be significant. The results of this study are consistent with the literature because many studied have a shown there exist a tradeoff between liquidity and profitability of banks affects the stock returns. This can be attributed to the fact that a stock price which affects the returns fully incorporates publicly available information according to EMT. The study recommends commercial banks should put in place good liquidity management frameworks so as to remain viable to make returns for their investors and CBK should monitor the liquidity of commercial banks continuously and report their findings to the public who are major investors in bank stocks.