The Effect Of Financing Decisions On Shareholders’ Value Creation Of Manufacturing Firms Listed At The Nairobi Securities Exchange In Kenya

Abstract

Financing decisions plays a key role in the creation of shareholders wealth. However, there exists dearth in literature relating to firms’ financing choices and their association with value creation to the shareholders from a Kenyan perspective. It is this in mind that this paper sought to seal the gaps in literature by establishing the influence of financing decisions on shareholders’ value creation of manufacturing firms quoted at the Nairobi Securities Exchange (NSE). Specifically, the current study sought to examine the influence of equity capital, debt capital, working capital and dividend capital forms of financing on value created to the shareholders. The study was anchored on three theories that helped explain the relationship among the variables. They included the trade-off theory of capital structure, the pecking order model of financing decisions and the market timing theory. The study employed longitudinal research design as it was deemed to be more informative. Census design was used as the number of listed manufacturing firms at the time of study was 13 companies. Secondary data was gathered from the audited and published financial statements. Panel Least Squares analysis were used to estimate the model suing the E-Views software version 11. To ensure non violation of the classical linear regression model assumptions, several diagnostic tests were conducted. The tests included normality, multicollinearity autocorrelation, heteroscedasticity, unit root and model specification tests. The assumptions were found not to have been violated and thus the model was found fit for further analysis. The specifications test found the fixed effect model to be the most appropriate for analysing the relationship amongst the variables. The study results revealed equity and debt financing had positive and statistically significant effect on shareholders’ value creation. Statistically insignificant but positive association was found to exist between dividend financing and shareholder value creation. However, working capital financing was found to have a statistically insignificant but negative effect on shareholders’ value creation. The study recommends that listed firms’ managers should carry out periodic shareholder value creation analysis. On policy, the study recommends that Capital Markets Authority should enact regulatory framework that mandated publication of shareholders’ value creation reports.