Effect Of Equity Financing On Shareholder Value Creation Of Firms Listed At Nairobi Securities Exchange

Abstract

The ability of management to make efficient and effective use of the company's resources, which contribute to the growth and development of the economy of the country, is essential to the well-being and continued existence of any organisation. It is a strong indicator of a company's ability to transform its financial resources towards the achievement of its mission and vision if the company is able to create positive shareholder wealth. The increase in shareholder wealth should be the primary focus of any and all decisions that management makes regarding equity financing, and the success of such decisions can only be judged based on their capacity to produce favourable outcomes and contribute to the growth of shareholder wealth. Most of listed firms at the NSE have been recording mixed results in relation to shareholder value creation over the past decade. The current study sought to investigate the effect of equity financing on shareholders’ value creation of firms listed at NSE. The study evaluated the effect of ordinary share capital, retained earnings and equity reserves on shareholder value creation of firms listed at the NSE. The study adopted descriptive research design. The target population of this study was 59 firms listed at NSE. A census sampling technique was adopted in this study. Secondary data was extracted from NSE audited annual financial reports database for the 10 years (2012-2021). STATA was used in this study to analyse the data. In order to investigate the nature of the relationship that exists between the independent and dependent variables, panel data regression analysis was carried out. Before beginning a regression analysis, diagnostic tests like the multicollinearity test, autocorrelation test, heteroskedasticity test, normality test, and Hausman test were also carried out. The results showed that the VIF values for each of the three independent variables ranged from 1 to 5, indicating that the values were moderately correlated and that, under the null hypothesis, the regression residuals would follow a normal distribution. Since FGLS is adaptable in handling Auto Correlation and Heteroscedasticty issues, panel data analysis techniques were used to fit the model. All independent variables had a statistically significant and positive association with shareholder value creation. Firms with more retained earnings on the NSE can enhance their shareholders' value creation, as retained earnings contribute to increased net income and profitability. The study recommended that policy makers at NSE should always strive to ensure that they maintain effective equity financing options as this is very likely to affect the overall shareholders value creation which is very critical for listed firm to attract prospective investors. It was also advised that the management of publicly traded companies always make sure that they have an efficient planning tool that can help them choose the best financing combination and strategies that create the most value for the shareholders, drawing in more potential investors.