Interest Rate Sensitivity and Market Value of Non - Financial Firms Listed at the Nairobi Securities Exchange

Abstract

This study sought to examine the relationship between interest rate sensitivity and the market value of non-financial firms listed on the Nairobi Securities Exchange (NSE) in Kenya. This study was motivated by the recognition that changes in interest rates can influence firms' financing costs, investment decisions, profitability, cash flows, capital structures, and ultimately their market valuation. The study adopted a quantitative research approach and utilized panel data obtained from non-financial firms listed on the NSE. The target population comprised 32 non-financial firms, generating 320 firm-year observations over a ten-year period from 2012 to 2021. The study employed a quantile regression model to examine the relationship between interest rate sensitivity and firms' market value across different points of the conditional distribution of market value. The use of quantile regression enabled the study to assess whether the effect of interest rate sensitivity varied among firms with relatively low, medium, or high market values, thereby providing a more comprehensive assessment than conventional mean-based regression approaches. A quantile regression model was applied to test the hypothesis. The result of the hypothesis test confirmed an insignificant relationship between interest rate sensitivity and firms' market value. The study recommended that non-financial firms should consider interest rate conditions alongside other firm-specific and macroeconomic factors when making financing, investment and capital structure decisions rather than relying solely on interest rate movements. Managers should also maintain prudent debt and equity structures and continuously monitor interest rate developments to manage potential financing and refinancing risks. Government policymakers and capital-market regulators should strengthen policies that promote stable and transparent financial markets, while investors should consider a broader range of financial and economic indicators when evaluating listed firms. Future researchers are further encouraged to incorporate additional firm-specific and macroeconomic variables, longer study periods and alternative estimation techniques to provide deeper insights into the determinants of market value among non-financial firms listed on the NSE.

Keywords:       Interest rate sensitivity; Market value; non-financial firms; Nairobi Securities Exchange; Quantile regression; Interest rates; Firm valuation; Financial risk; Capital structure.