Abstract
It is necessary that efforts are put in place by the global investing public to address the ever increasing need to accurately measure performance and financial strength of firms (Pandey, 2013). Analysts of financial statements and investors at the stock market consider a multiplicity of factors and metrics when making decisions on what stocks to invest in. Not much is known on whether change in market prices of securities really reflects results of published financial statements. Whether liquidity ratios models is appropriate for predicting the market prices of shares of firms listed at the Nairobi Securities Exchange (NSE) is the sole question this study endeavours to address. Correlational research design was used. A census of all non financial firms listed at the NSE was conducted and secondary data collected through computation of average rate of change (AROC) in market price of shares, computation of current ratios (CR) and net working capital to total assets (NWCTTA) of non financial firms listed at the NSE for the financial years 2012 to 2016. Panel data was analysed using descriptive statistics, inferential statistics and diagnostic tests. Inferential statistics involved development and testing of predictive ability of liquidity ratios panel data regression model. It was established that announcement of annual financial statements led to a positive mean AROC in market price of shares. Liquidity ratios did not have statistically significant influence on AROC in market price of shares. CR had a statistically insignificant negative effect while NWCTTA ratio had statistically insignificant positive effect on AROC in market price of shares for non financial firms listed at NSE. Also the liquidity ratios model was found not to be statistically significant appropriate in predicting shareholder wealth of non financial firms listed at NSE. Keywords: Average rate of change in market price, liquidity ratios models, current ratio and net working capital to total assets DOI : 10.7176/RJFA/10-22-14 Publication date: November 30 th 2019
Highlights
According to Damodaran (2010) stock price for publicly listed firms is considered by investors to be an observable and real measure of shareholder wealth
The results indicate that all liquidity ratios had means that were positive, with mean current ratios (CR) being greater than unit (i.e. 2.382025), while mean net working capital to total assets (NWCTTA) ratio was less than unit (i.e. 0.0857385)
Announcement of annual financial statements led to a positive mean average rate of change (AROC) in market price of shares
Summary
According to Damodaran (2010) stock price for publicly listed firms is considered by investors to be an observable and real measure of shareholder wealth. Accurate measurement of performance of firms facilitates prediction of wealth attributable to shareholders well in advance instead of relying on market value as reflected by market share prices (Pandey, 2013) To realize this objective investors and financial market analysts engage in financial statement analysis to acquire information that will enable them and or their clients to make informed investment decisions (Irungu & Gatuhi, 2013). Due to diverse information needs it is necessary that users of financial statements employ varied analytical techniques to identify information they perceive to be most relevant for a particular decision Metrics such as financial statement ratios are considered to be a powerful tool of financial statement analysis, capable of removing the size factor and facilitate more relevant comparison. Financial indicators of performance such as liquidity, profitability, operational efficiency, leverage, and market performance ratios constitute significant tools of deriving meaning from financial statement information
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