Effect Of Macroeconomic Factors On The Firm Value Of Listed Commercial Banks In Kenya

Abstract

This study evaluated the relationship that existed between macroeconomic variables and the firm value of the listed commercial banks in Kenya. From the available literature, it had been found that differing opinions and findings existed on the nature of the impact of macroeconomic variables on firm value. In addition, studies conducted to assess the link between macroeconomic factors and the firm value of listed commercial banks in Kenya were found to be scanty. Hence, it is not clear whether or not macroeconomic conditions influence the firm value of Kenya’s commercial banks. The internal factors may be regulated by each institution but not the macroeconomic factors. The main objective of this study therefore was to ascertain the effect of selected macroeconomic factors on the firm value of banks listed in Nairobi Stock Exchange. The macroeconomic factors selected constituted of inflation levels, economic growth, exchange rates and interest rates. Specifically, the study sought to investigate the influence of economic growth, inflation rates, interest rates and exchange rates on the firm value of Kenya’s listed commercial banks. The study was guided by the shareholder value theory, foreign exchange exposure theory, theories of inflation and the Keynesian economic theory. The study applied a descriptive research design. The study targeted all the listed commercial banks at the Nairobi Stock Exchange for the period 2008 to 2019. A census approach to sampling was applied. The study used secondary data collected using a secondary data collection template. Descriptive analysis and also inferential analysis were conducted when analyzing the data. A panel data regression model was used to show the relationship between macroeconomic factors and the firm value of listed commercial banks in Kenya. A statistical software, Stata was used to facilitate the data analysis exercise. The findings’ presentation took the form of tables and charts. The study established that three of the macroeconomic factors considered in this study namely economic growth, inflation rate and exchange rate had a significant effect on the firm value of listed commercial banks in Kenya over the study period. Interest rate however, was found to have insignificant effect on the firm value of these banks. Economic growth positively influenced the firm value of the listed commercial banks under study while inflation rate, exchange rate as well as interest rate negatively influenced the firm value of these banks. The study therefore concluded that macroeconomic factors particularly economic growth, inflation rate and also exchange rate are significant factors that influenced the firm value of listed commercial banks in Kenya and therefore, it was prudent for the management of banks to consider them when evaluating the factors likely to impact the value of their banks. Several recommendations were made to various parties among them the need for policy makers and economists at the Central Bank of Kenya in conjunction with other regulators to undertake sound planning in advance so as to influence macroeconomic variables in the right direction. The banks’ management should also strive to ensure sustained high firm value for the sake of the stability of their operations as well as good prospects for their banks in the future. This will enhance their survival. The banks’ management also ought to develop their banks’ capabilities to be highly sensitive in anticipating the effect of macroeconomic factors which are external forces to their firms and are unavoidable. The findings of this study would therefore benefit several key stakeholders such as the banks’ management, market and industry regulators, investors as well as other scholars pursuing related research.