ABSTRACT
The research study focused on the effect of liquidity management on the security market performance at the Nairobi Securities Exchange. The specific objectives of the study include: to establish liquidity management of companies listed on the NSE, to determine the security market performance of companies listed on the NSE and to evaluate the effect of liquidity management on market performance of companies listed on the NSE. The study was carried out in Kenya and included a purposive study of fourteen (14) companies that are listed on the NSE. The study covered a period of 72 months from January 2008 through to December 2013. The study used quantitative survey method to evaluate how liquidity management affects security market performance at the NSE in Kenya. Secondary data was used and it was derived from the NSE, CBK and published financial statements of the quoted companies. The data collected was coded and analyzed with the help of MS Excel. After analyzing the data it was presented by the use of pictorial representations such as tables and line graphs. The study also used the Ordinary Least Squares (OLS) Regression model. Using quick ratio to show liquidity performance, the study revealed that all the companies that were studied had a quick ratio of above 1 showing that they have tied a lot of their money on liquid assets, this may be because of the fear of not being able to meet their short term liabilities as they fall due and also because of the fear of imminent collapse. From the study findings of the high liquid portfolio excess return and the Low liquid portfolio excess return it was revealed that there is a significant difference between the market performance of high liquid portfolio companies and that of the low liquid portfolio companies. This could possibly be because the high liquid portfolio companies are very risky (CV= 203.53) while the low liquid portfolio companies are less risky (CV =-0.8997) as indicated by the coefficient of variation. Lastly the study revealed that liquidity management has an effect on the market return/ performance (t calculated = 1.32488) albeit for the low liquid companies (t calculated = 3.86621). Because of the failure to influence market performance of high liquid companies it was observed that the effect of liquidity management on the security market performance at the NSE increases with the level of low liquidity. It is recommended that the results of this study should be interpreted diligently possibly because the study focused on using statistical tests to examine returns and results are used to make conclusions and also because the study looked at only 72 months which is not a very long period.
CHAPTER ONE
INTRODUCTION
Background of the Study
Liquidity is perceived to be the degree to which a security or an asset can be sold or bought in the market without affecting the asset price. Liquidity can also be referred to as the capability of a going concern to meet its short term obligations as and when they fall due. Liquidity can be used to describe how quickly, easily and costly it is to convert that asset into cash (Berger & Bouwman, 2008). Liquidity plays a crucial role in the successful functioning of a business firm. In this paper working capital and liquidity are used to mean one and the same thing and relates to the management of current assets and currents liabilities of a company. This synonymy is based on the observation that working capital ratios are the most common measures of liquidity (Lamberg, & Valming, 2009). Effective working capital management consists of applying the methods which remove the risk and lack of ability in paying short term commitments in one side and prevent over investment in these assets in the other side by planning and controlling current assets and liabilities (Lazaridis & Tryfonidis, 2006).
Liquidity can be measured by various ratios such as current ratio, quick ratio and cash ratio. Current ratio determines a company’s ability to pay short term debts as they fall due (Van Ness, 2009). It is also used to indicate the liquidity policy of the businesses, where a high current ratio indicate a company with a liberal liquidity policy while a low ratio indicate a stringent liquidity policy. The ratio is computed as current assets divided by current liabilities. Quick ratio is another measure of liquidity which is computed as current assets minus inventories divided by current liabilities. The quick ratio is a sterner test of liquidity also referred to as the ‘acid test’. A quick ratio of no less than one would be required to point out the ability to meet short term obligations as they fall due. The quick ratio is considered as a more satisfactory or more reliable indicator of a company’s financial strength and its ability to meet short term obligation.
Lastly, the cash ratio is considered to be the most conservative ratio under the liquidity ratios. It is calculated as cash divided by current liabilities. The cash ratio measures the instantaneous amount of cash available to satisfy short term debt. This ratio looks only at assets that can be most easily used to pay off short-term debt and it disregards receivables and short term investments. The argument for using the cash ratio is that receivables and short term investments often cannot be liquidated in a timely manner (Penman, 2007).
In order for a business entity to function successfully, liquidity management must play a significant role. A business firm or entity should ensure that it does not suffer from excess or lack of liquidity to meet it short term obligations as and when they fall due. A study of liquidity is of major importance to both the internal and external analysts because of its close relationship with the day to day operations of the business (Bhunia, 2010). The major importance of liquidity management as it affects the security market performance in today’s business world cannot be over emphasized. With the present financial situation and the status of the world’s economy liquidity management is a notion that is receiving serious attention all over the world.
The vital factor in any business operation is its liquidity. For any business to survive, the organization or firm should have the required degree of liquidity, which should neither be excessive or inadequate. When the liquidity is excessive it means that there is accumulation of ideal funds and this may lead to lower market performance of securities and profitability whereas inadequate liquidity may result in interruptions of the business operations. For the efficient operation of the business a proper balance between these two extremes should be attained.
One of the integrated parts of financial management is the efficient management of liquidity. The magnitude of sales normally determines the degree to which liquidity can be gained. The amount of liquidity required by a firm depends on various factors such as the nature of business or industry, operating efficiency, size of business or scale of operations, business cycle, manufacturing cycle, operating cycle and rapidity of turnover, profit margin, profit appropriation and depreciation policy, growth prospects, taxation policy, dividend policy and government regulations. It is of utmost significance to maintain a constant eye on the liquidity position of an organization since without it, it cannot survive.
Liquidity management refers to the planning and control, necessary to ensure that the organization maintains enough liquid assets either as an obligation to the customers of the organization or so as to meet some obligations incidental to survival of the business. Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on one hand and avoids excessive investment in these assets on the other hand (Eljelly, 2004).
A financial market is a market either physical or virtual in which individuals and organizations can trade financial securities and commodities at a fair price that reflects both supply and demand. The financial securities include bonds and stocks whereas the commodities traded in the financial markets include agricultural goods and precious metals. The financial markets work by placing interested buyers and sellers in one place hence making it easier for them to access each other.
Within the financial sector, the term "financial markets" is often used to refer to the markets that are used to raise finance that is the capital markets for long term finance and the money market for short term finance (Robert and Vincenzo, 2012). The major functions of a financial market include transferring of resources, enhancing the economy, capital formation, promoting investments and savings, facilitating credit creation and providing liquidity to commercial banks.
In order to avoid liquidity crisis, management of businesses and financial institutions in particular needs to have a well-defined policy and established procedures for measuring, monitoring, and managing liquidity. Managing liquidity is therefore a core daily process requiring managers to monitor and project cash flows to ensure that adequate liquidity is maintained at all times (Berger & Bouwman, 2008). The study therefore sought to evaluate the effect of liquidity management on the security market performance at the NSE over a 6 years period that is January 2008 to December 2013.
Statement of the Problem
Business success depends heavily on the ability of financial managers to effectively manage the components of working capital (Filbeck& Krueger, 2005). Where they exist, studies conducted in Kenya to explore the effect of working capital management on performance they have not addressed the effect of liquidity management on the security market performance. Nyamao et al. (2012) for instance considered working capital management in terms of efficiency of cash, inventory and receivables management and found out that there is a negative relationship between the time when the cash is collected from the customers and the firm’s productivity and there is a positive relationship between the inventories when they were brought in and the period to which they are sold and the firm’s profitability. Further, Mathuva (2009) focused on the impact of working capital management on the performance and focused on the implication of working capital management on Liquidity risk. Although both are relevant, they ignored the effect of liquidity management on the security market performance at the Nairobi Securities Exchange. Accordingly, whereas liquidity management is one of the key pillars in financial management, it is not clear how it affects the security market performance at the NSE. This is particularly glaring literature gap given that companies quoted at the NSE form a key component of the country’s GDP hence enhanced economic activity (KNBS, 2013). It is against this background that this study was done.
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Item Type: Kenyan Topic | Size: 72 pages | Chapters: 1-5
Format: MS Word | Delivery: Within 30Mins.
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