Effect of liquidity management on the security market performance of companies listed at the Nairobi securities exchange

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