The effect of liquidity on the market value of Commecial Banks listed at the Nairobi Securities exchange

Abstract

The objective of this study was to establish the existence of liquidity effect and its components on the market value of commercial banks listed at the Nairobi Securities Exchange. The study was a cross-sectional survey in which case the relationship between liquidity and market value of commercial banks listed at the NSE was determined. The dependent variable was the market value as measured through share prices while the independent variables were, cash position indicator, total deposit ratio, loan deposit ratio, liquidity ratio and earnings per share. Secondary data collection was employed to obtain the measures of these variables from the NSE data and audited financial statements of the commercial banks under this study. The period of this study was 2009 to 2013 which was considered adequate and for an individual bank to qualify it needed to have operated throughout this set period. Out of the 11 banks listed at the NSE only 10 qualified this criteria. Since the population was small a census study was preferred. Aided by SPSS analytical tool, multiple regression analysis was used to establish the existence of any relationship of the study variables and in testing of goodness of fit for the model R square, p-value and t-test at significance level of 5% were used. With R (correlation coefficient) of 95.2% the results indicated a very strong linear relationship between market value and liquidity. The components of liquidity showed varying relationship on the market value. The cash position indicator, total deposit ratio, loan deposit ratio and liquidity ratio indicated a negative relationship with market variable and statistically insignificant. Whereas the earnings per share relationship with the dependent variable, market value was positive and statistically significant. The study concludes that there exist a very strong relationship between liquidity and market value of the commercial banks listed at the Nairobi Securities Exchange. The study further concluded that earnings per share as a component of liquidity has a positive effect on the market value of these commercial banks thus for each unit increase on earnings per share will lead to a unit increase on the market value, while the remaining components of liquidity, a unit increase of these components will lead to a unit decrease on the market value. The study recommends investors to pay greater attention on the components of liquidity of listed commercial banks at the Nairobi Securities Exchange to give them an indication of the trend of the market value as reflected in the share prices. The study further recommends that other measure of market value should be examined to further prove these study findings