Relationship Between Corporate Liquidity And Investments Of Companies Listed At Nairobi Securities Exchange

Abstract

A company must preserve adequate amount of liquidity to meet its daily obligations, but liquidity in excess of what is adequately required by the company to finance it operations may be counter-productive. The optimal investment in liquidity increases the cost of external financing, the variance of the future cash flows, and the return on future investment opportunities, while is decreases the difference between the firm’s physical assets and the liquid assets. In most cases investors demand a premium for securities that have a longer maturity period, this entail a high risk since most investors prefer to hold cash which is less risky. The study sought to establish the relationship between corporate liquidity and investments of companies listed in Nairobi Securities Exchange. A descriptive research design was applied in this study. The population of interest in this study consisted of 54 firms quoted in the Nairobi Securities Exchange. In this study emphasis was given to secondary data which was obtained from the financial statements covering the years 2010-2014 for companies investments, current assets, current liability, companies’ debts/equity and the total assets of which are publicly available. In order to test the relationship between the variables, the inferential tests including regression analysis was used to determine the effect of corporate liquidity on investments. The study found that the liquidity, leverage and firm size contribute to 66.5% of investments and that a unit increase in liquidity leads to a 0.098 increase in investments. The study concludes that corporate liquidity affects the level of investments of companies listed in the NSE. The conclusion is that corporate liquidity has a positive and significant effect on investments of companies listed in the NSE for the period of this study. The study recommends that adequate funding should be directed towards investments for optimum structure of the liquidity, and to make a proper balance between liquidity and investments. The study suggests that research should be extended to none listed companies and also for longer period of time. Inclusion of none listed companies may help in elimination of any biasness that may be associated with listed companies as listed companies are also regulated by Capital Market Authority.