The relationship between working capital management and the systematic risk of companies quoted at the Nairobi securities exchange

Abstract

In any firm or an organization the issue of risk is of a great importance to anyone interested in finance either as an investor or a finance manager. This is so because while the main objective of any investment is for its return, partly depends on the risk level associated with that investment. That is, the higher the risk the higher is the expected returns and vice versa. This being the case however, it has been established further that investors can diversify away part of this risk. The part of risk which cannot be diversified away is systematic risk and this is what concerns the manager most. A well designed and implemented working capital management is expected to contribute positively to the creation of shareholders’ wealth. The purpose of this study was to determine the empirical relationship between working capital management and firm’s systematic risk. The study used secondary data obtained from annual reports and financial statement of companies listed at the Nairobi Securities Exchange. A sample of 20 companies listed at the Nairobi Securities Exchange for a period of seven years from 2008 to 2014 was studied to determine the effect of different variables of working capital management including average payment period, inventory turnover in days, average collection period and cash conversion cycle on the beta. Current ratio, size of the firm (measured in terms of natural logarithm of sales), fixed financial assets to total assets ratio and debt ratio were used as control variables. Pearson’s correlation and regression analysis (pooled least square) were used for analysis. The results show that there is no statistical significant relationship between variables of working capital management and the beta of a firm. This means that the manager may not mitigate systematic risk of a firm by handling correctly the cash conversion cycle and keeping each different component of working capital management at an optimal level.