Firm Characteristics and Operational Efficiency of Agricultural Firms Listed at Nairobi Securities Exchange in Kenya

doi:10.7176/rjfa/12-24-01

Abstract

Operational efficiency has attracted much interest in corporate finance literature over several decades. However, in the context of the agricultural sector, it has received little attention in developing economies such as Kenya. Operational efficiency and performance of Agricultural firms listed at the Nairobi securities Exchange have been fluctuating over the years. This is partly attributed to specific firm characteristics. The objective of this study was to determine the relationship between firm characteristics and operational efficiency of agricultural firms listed at Nairobi securities Exchange. The study was anchored on trade off theory, liquidity preference theory, agency theory, miller and Orr’s cash management model. The target population was 7 agricultural companies listed at Nairobi securities exchange. The study used audited financial statements’ secondary data collected from 2011 to 2020. Data was analysed using descriptive statistics, correlation analysis and panel data regression analysis with the help of STATA version 13. The study found out that there was a significant negative relationship between asset tangibility, firm size and operational efficiency of agricultural companies listed at Nairobi securities exchange. Further, there is a significant positive relationship between cash reserves and operational efficiency of agricultural firms listed at Nairobi securities exchange. This study recommends that management of agricultural companies listed at Nairobi securities exchange should pay attention on asset tangibility, firm size and cash reserves because they have a significant relationship with operational efficiency. Firms can utilize productive assets as collateral for debt without incurring high borrowing costs. The firm size should be optimal because very large firms are characterised by inefficiencies due to control weaknesses. Policy makers should incorporate factors such as asset tangibility, firm size and cash reserves in their strategic plans. Keywords : Operational efficiency, firm characteristics, firm size, liquidity, asset tangibility and cash reserves. DOI: 10.7176/RJFA/12-24-01 Publication date: December 31 st 2021

Highlights

Firm characteristics are distinct features of a firm such as ownership structure, capital structure, firm age, firm size, number of employees and liquidity level (Ganguli, 2013)
Using panel data regression analysis, the null hypotheses for firm size, cash reserves and tangibility was rejected and it was concluded that there is a significant relationship between firm size, cash reserves and tangibility, and operational efficiency of agricultural companies listed at the Nairobi securities exchange
In this study panel data regression analysis was used to explain the relationship between firm characteristics and operational efficiency of agricultural companies listed at the Nairobi securities exchange

Summary

Introduction

Firm characteristics are distinct features of a firm such as ownership structure, capital structure, firm age, firm size, number of employees and liquidity level (Ganguli, 2013). Kogan and Tian (2012) stated that fundamental factors such as turnover, growth in sales and assets, liquidity, leverage and firm size constitute a firm’s characteristics. Firm characteristics used in this study were firm size, liquidity, cash reserves and asset tangibility. This study used the log of total assets to measure firm size. Irungu (2019) used the log of total assets as the proxy for firm size. Bhunia (2010) stated that liquidity refers to the firm’s ability to pay its short-term financial obligations. Liquidity and operational efficiency are conflicting objectives that firms strive to achieve by diversifying their asset portfolio (Akenga, 2017). This study used the current ratio to measure liquidity

Objectives

Results

Conclusion