Asset Tangibility and Financial Performance: The Moderating role of Economic Growth and Earnings Volatility

Abstract

The Kenyan manufacturing sector’s contribution to the economy has been declining. It has stagnated at 10% of the gross domestic product (GDP), contributing to an average of 10% from 1964-1973 and marginally increased to 13.6% from 1990-2007 and has been below 10% in recent years further dropping to 8.4% in 2017 and 7.1% in 2020 ultimately hitting its lowest in 2022 of 7.2%. The government has renewed its efforts to revive the sector to grow its contribution to GDP to 20% by 2030. Asset tangibility is a significant determinant of how counterparties and external financiers value a firm and hence turn around its fortunes. This study applied Dynamic Unbalanced Panel analysis techniques using Secondary data for 10-year period (2010 - 2019) with the study population comprising of 9 listed firms. A census of the firms was done and resulted to 86 observations. Focus was on asset tangibility moderated by economic growth rate and earnings volatility on firm value which was proxied by Tobin’s Q and EVA. Pecking order guided the study. Longitudinal research design was used as it is appropriate when dealing with panel data. STATA version 15 was used for analysis. Model estimation followed a two Step System GMM testing the study hypotheses at 5 % significance level. Pearson correlation coefficient was used to show the strength and direction of association among the study variables. ATNG was positively correlated with Tobin Q (r = 0.4331) and LnEVA (r = 0.3683). The regression weights were also positive and significant. The study therefore concluded that asset tangibility is imperative as it directly determines the financial burden firms face in their operations and recommended that the managers of manufacturing firms need to consider project financing to limit exposure to credit risk. Future studies can consider a balanced panel analysis and other panel data econometric techniques. Keywords: Asset tangibility, Firm Value, Financial Performance, Manufacturing firms.