Does Financial Attributes Matter? An Empirical Assessment of Liquidity, Dividend Decisions, and Firm Size on Value of Firms Listed at the Nairobi Securities Exchange

Abstract

This study explores the combined effects of firm liquidity, dividend policy, and firm size on the value of firms listed on the Nairobi Securities Exchange. It posits that firm value is crucial in finance, as it results from various corporate decisions, including investment, risk management, and profitability, alongside financing choices like liquidity management and dividend policy. Earlier theories emphasized that investment decisions primarily influence firm valuation; however, empirical studies underscore the significance of liquidity, dividend policy, and firm size, particularly in emerging markets characterized by information asymmetry and financing constraints. The study utilizes cash conversion cycle, dividend signaling, and agency theories to create a conceptual framework analyzing how these factors collectively affect firm value, quantified using Tobin’s Q. Adopting a positivist research philosophy and a descriptive longitudinal design, the study analyzed secondary financial data from all 63 NSE-listed firms from 2008 to 2022, yielding 765 observations. Firm liquidity was measured through short-term liquidity, asset convertibility, and new debt capacity; dividend policy was assessed via payout ratios and dividend yield; and firm size was defined in terms of total assets and employee count. The findings revealed that liquidity positively significantly impacts firm value, marking its crucial role in enhancing market perceptions. Conversely, dividend policy and firm size were analyzed as independent variables to determine their effects on firm value. The study concludes that liquidity is the main factor influencing firm value, whereas dividend policy and firm size also have a positive impact on the model’s explanatory power. The results suggest that larger firms and those with well-defined dividend policies can enhance their valuation, thereby underscoring the significance of cohesive management strategies aimed at boosting firm value, particularly in emerging markets. 

Keywords: Firm Value Liquidity Dividend Policy Firm Size Tobin’s Q