Appropriateness of Liquidity Ratios Model in Predicting Shareholder Wealth of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

It is necessary that efforts are put in place by the global investing public to address the ever increasing need to accurately measure performance and financial strength of firms (Pandey, 2013). Analysts of financial statements and investors at the stock market consider a multiplicity of factors and metrics when making decisions on what stocks to invest in. Not much is known on whether change in market prices of securities really reflects results of published financial statements. Whether liquidity ratios models is appropriate for predicting the market prices of shares of firms listed at the Nairobi Securities Exchange (NSE) is the sole question this study endeavours to address. Correlational research design was used. A census of all non financial firms listed at the NSE was conducted and secondary data collected through computation of average rate of change (AROC) in market price of shares, computation of current ratios (CR) and net working capital to total assets (NWCTTA) of non financial firms listed at the NSE for the financial years 2012 to 2016. Panel data was analysed using descriptive statistics, inferential statistics and diagnostic tests. Inferential statistics involved development and testing of predictive ability of liquidity ratios panel data regression model. It was established that announcement of annual financial statements led to a positive mean AROC in market price of shares. Liquidity ratios did not have statistically significant influence on AROC in market price of shares. CR had a statistically insignificant negative effect while NWCTTA ratio had statistically insignificant positive effect on AROC in market price of shares for non financial firms listed at NSE. Also the liquidity ratios model was found not to be statistically significant appropriate in predicting shareholder wealth of non financial firms listed at NSE.

Keywords: Average rate of change in market price, liquidity ratios models, current ratio and net working capital to total assets

DOI: 10.7176/RJFA/10-22-14

Publication date: November 30^th 2019