Effect of Short-Term Debt on Financial Growth of Non-Financial Firms Listed at Nairobi Securities Exchange

David Haritone Shikumo ,Oluoch Oluoch ,Joshua Matanda Wepukhulu

doi:10.7176/rjfa/11-17-16

Abstract

A significant number of the non-financial firms listed at Nairobi Securities Exchange (NSE) have been experiencing declining financial performance which deter investors from investing in such firms. The lenders are also not willing to lend to such firms. As such, the firms struggle to raise funds for their operations. Prudent financing decisions can lead to financial growth of the firm. The purpose of this study is to assess the effect of short-term debt on financial growth of non-financial firms listed at Nairobi Securities Exchange for a period of ten years from 2008 to 2017. Financial firms were excluded because of their specific sector characteristics and stringent regulatory framework. The study is guided by Agency Theory and Theory of Growth of the Firm. Explanatory research design was adopted. The target population of the study comprised of 45 non-financial firms listed at the NSE for a period of ten years from 2008 to 2017. The study conducted both descriptive statistics analysis and panel data analysis. The result indicates that, short term debt explains 45.99% and 25.6% of variations in financial growth as measured by growth in earnings per share and growth in market capitalization respectively. Short term debt positively and significantly influences financial growth measured using both growth in earnings per share and growth in market capitalization. The study recommends that, the management of non-financial firms listed at Nairobi Securities Exchange to employ financing means that can improve the earnings per share, market capitalization and enhance the value of the firm for the benefit of its stakeholders. Keywords : Short Term Debt, Non-financial Firms, Nairobi Securities Exchange, Growth in Earnings per Share, Growth in Market Capitalization. DOI: 10.7176/RJFA/11-17-16 Publication date: October 31 st 2020

Highlights

Short term debt is part of the financial structure
1.2 Statement of the Problem A significant number of the non-financial firms listed at Nairobi Securities Exchange (NSE) have been experiencing declining financial performance which deter investors from investing in such firms (Muchiri, Muturi & Ngumi, 2016)
Secondary data for short term debt, earnings per share and market capitalization were extracted from firms published audited financial statements and NSE handbooks

Summary

Introduction

Short term debt is part of the financial structure. Financial structure is the way a firm finances its assets through some combination of debt and equity that a firm deems as appropriate to enhance its operations (Kumah, 2013). The determination of a firm’s optimal financial structure is vital in deciding how much money should be borrowed and the best mixture of debt and equity to fund business operations (Shubita & Alsawalhah, 2012). Short-term assets should be financed with short-term liabilities (Guin, 2011). Short term debt is measured as short-term liabilities divided by total assets. The anecdotal evidence suggests that there is a positive relationship between short term debt financing and financial performance (Yazdanfar & Öhman, 2015)

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Conclusion