FIRM CHARACTERISTICS AND FINANCING OF WORKING CAPITAL REQUIREMENT IN ORGANISATIONS: A CASE OF NON-FINANCIAL FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE (NSE)

Abstract

Decisions on financing of working capital requirement are very important because of their impact on the profitability and liquidity of a firm. The firm, therefore, has to maintain an optimal strategy for financing working capital requirement that will enable it to maximize its value. The optimal strategy varies across firms and it depends on firm characteristics. The key goal of this research was to assess whether firm features are considered by managers of non-financial firms itemized at the Nairobi Securities Exchange in making decisions on how to fund their working capital requirement. The particular intents were to find out the bearing firm size, profitability, current assets and sales growth have on the financing of the working capital requirement of non-financial firms listed at the Nairobi Securities Exchange. The study adopted a panel research design. The target population was 38 Nairobi Securities Exchange-listed non-financial firms as of 31st December 2016 and 27 of these firms formed the accessible population for this study. The sample consisted of all the members of the accessible population and the sample period was from 2010-2016. Secondary data extracted from the published annual financial statements were used to compute the relevant measures of the variables and the data was imported into the Eviews software for data analysis. Panel diagnostics tests were done on the data to test for normality, stationarity, multicollinearity and to determine whether to adopt a fixed effects or a random effects panel regression model. The results of the diagnostic tests suggested that a fixed effects panel regression model was the most appropriate to estimate the effect of the explanatory variables on the dependent variable, and the test was conducted at 5% significance level. From the results of the aforesaid model, firm size was established to have positive and a significant impact on financing of working capital requirement of non-financial firms listed at the Nairobi Securities Exchange while profitability and current assets had a significant negative effect. The results also established that the relationship between sales growth and financing of the working capital requirement of Nairobi Securities Exchange-listed nonfinancial firms was positive but insignificant. From the findings, it was concluded that firm size, profitability, and current assets are significant factors in determining how to finance the working capital requirement of non-financial firms listed at the Nairobi Securities Exchange. The research, for that reason, recommends that as Nairobi Securities Exchange-listed non-financial firms increase in size, they should use more short-term debt to finance their working capital requirement. It is also recommended that highly profitable firms and those with huge amounts of current assets in their asset structure should use less short-term debt to finance their working capital requirement. Finally, Nairobi Securities Exchange-listed non-financial firms do not need to consider sales growth as an important factor when making decisions on how to finance their working capital requirement. The results of this study are very important because they will assist firms in making decisions on the optimal working capital requirement financing strategy that maximizes the value of the firm.