Liquidity Preference Theory Research Articles

Paul Davidson (1930–2024) and the founding of Post Keynesian economics

Paul Davidson was a critical figure in the preservation of John Maynard Keynes’s ideas, sticking with them when they were out of fashion. He was also key to the survival of the Post Keynesian school. Davidson endorsed Keynes’s liquidity preference theory of interest, and he emphasized fundamental uncertainty as a central feature of economic reality, essential to making sense of a monetary economy. His greatest legacy is the Journal of Post Keynesian Economics, the intellectual home for a generation of Post Keynesian economists. Without his efforts, the heterodox economics community would be significantly smaller than it is now.

EFFECT OF FUNDING STRUCTURE AND LIQUIDITY ON THE FINANCIAL PERFORMANCE OF THE SUGAR INDUSTRY IN KENYA

<p>The main objective of this study was to establish the effect of liquidity on the financial performance of the sugar industry in Kenya. The correlation between financial performance and liquidity in the Kenyan sugar industry is significant, ensuring the sector can meet immediate obligations and maintain smooth operations. Low liquidity can disrupt profitability and long-term stability, while high liquidity improves operational efficiency. Applying Stockholder and Liquidity Preference Theories to guide the study while employing correlational research design on a target population of 16 sugar companies operational in Kenya, sampled for 9 sugar companies, a total of 324 secondary data points from 2014 to 2022 were collected. Data was collected on the cost of the current ratio, acid test ratio, and economic value added, all derived from financial statements and cash flows. The results revealed a significant and positive relationship between liquidity and Economic value added (coefficient 0.939539, p=0.000<0.05); implying that liquidity has a significant relationship with economic value added. The findings are relevant for investors, policymakers, and factory managers. The study recommends that factory managers and policymakers ensure healthy liquidity within the sugar industries.</p><p> </p><p><strong>JEL: </strong>M41, G30, G32</p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/soc/0735/a.php" alt="Hit counter" /></p>

Relationship between Financial Risk Exposure and Non-Performing Loans of Commercial Banks in Kenya

Currently, there is a financial crisis affecting commercial banks in Kenya occasioned by high levels of loan loss provision as a result of Non-Performing Loans. The past decade has seen the collapse of major banks like Chase Bank among others. This trend on Non-Performing Loans of the institutions requires urgent measures to reverse failure to which the entire sector is likely to collapse, and customers would lose a significant amount of their deposits. This study sought to investigate the effect of credit risk and liquidity risk on non-performing loans (NPLs) of commercial banks in Kenya and appraise the moderating effect of firm age on the relationship between financial risk exposure on non-performing loans of commercial banks in Kenya. The study was underpinned by liquidity preference theory. The examination adopted a positivist paradigm guided by explanatory research design. The study targeted 40 commercial banks as the unit of analysis while branch managers, operations and risk managers were the units of observation drawn from the banks adding to 120 respondents and census was used. The study collected both primary data using structured questionnaire on the independent variable and secondary data from publications by Central Bank of Kenya (CBK) and respective banks and the same was analyzed through the statistical package for social sciences (SPSS) version 26 in a descriptive and inferential manner. The study established that credit risk (p<0.05) and liquidity risk (p<0.05) were all found to have significant effect on NPLs of commercial banks in Kenya and significantly moderated by their sizes. It was concluded that financial risk exposure has significant effect on NPLs of commercial banks in Kenya. It was recommended that finance manages working in commercial banks in Kenya to balance the investment in short term and long-term assets to maintain operational liquidity levels for better management of liquidity risks. Credit managers working for commercial banks in Kenya need to review the existing credit risk management efforts and mechanisms to minimize exposure to NPLs.

Intersecting Dynamics: The Influence of Macroeconomic Factors and Financial Development on Interest Rate Spreads in Uganda

The study investigates the factors influencing interest rate spreads in Uganda's banking sector, focusing on inflation, GDP, Real Effective Exchange Rate (REER), private sector credit, and financial development. Using an Autoregressive Distributed Lag (ARDL) model on data from 2001 to 2022, it examines short and long-term dynamics between these variables and interest rate spreads, within the liquidity preference theory framework. In the short run, inflation and GDP have marginally significant positive impacts on interest rate spreads, indicating that initial increases may widen spreads due to heightened liquidity demand and economic activity. Conversely, in the long run, these factors exhibit significant negative effects, suggesting a stabilizing influence of monetary policy and increased market efficiency. The REER's short-term impact reflects currency value fluctuations affecting risk premium adjustments, which diminish in the long run as markets adapt. The study also explores the interaction between inflation and financial development, represented by private sector credit, on interest rate spreads. Short-term results show a non-significant negative moderation by financial development, while long-term analysis suggests a potential amplification of inflation's effects as the financial sector matures, requiring nuanced financial development policies. Policy recommendations stress the importance of stabilizing inflation and exchange rates to control interest rate spreads in the short term. Long-term strategies include enhancing banking sector efficiency and promoting competitive practices to mitigate the negative effects of economic growth on interest rate spreads.

The Effect of Interest and Inflation Rates on Stock Returns: Quantile Regression Analysis for Türkiye

According to financial theory, there is an inverse relationship between interest rate and stock returns and prices. In the framework of the Liquidity Preference Theory, the rise in interest rates causes the money to move towards higher interest rates, so demand for stock market decreases and returns fall. The behaviour of stock prices on interest rates and inflation has been investigated by various time series analysis methods. However, in this study, the subject is handled in a different approach by using the Quantile Regression (QR) method. In the study, nominal interest rate is decomposed into real interest rate and inflation components and effects on stock prices are examined for the period January 2013 - July 2023 separately for services, financial, industrial and technology sector indices. When it comes to the impact of nominal and real interest rates on returns in QR estimates, it is seen that the service and industrial sectors differ in terms of both tail and sign. The similarities between Least Squares estimates and QR estimates are striking. However, the effect of volatility in variables on the differentiation in relationships is also an issue that should be emphasized.

Schumpeter and the post‐Keynesian monetary theory

AbstractThe name of Schumpeter is not among those of the precursors of post‐Keynesian monetary theory. This seems understandable when considering Schumpeter's ferocious criticism of The General Theory. However, in recent years various authors have highlighted significant points of contact between Schumpeter's monetary theory and that of Keynes and of post‐Keynesians. The objective of this work is not only to indicate the similarities between Schumpeter's monetary theory and that of the post‐Keynesians, but rather to show that Schumpeter's approach to money and credit allows making post‐Keynesian monetary theory more solid. In particular, we will show that Schumpeter's monetary theory enables to develop an explanation of the principle of effective demand sounder than that based on the simple presence of endogenous money and on the liquidity preference theory.

Financial Crises and Economic Downturns of Commercial Banks in North Rift Region, Kenya

Financial Crises and Economic Downturns of Commercial Banks in North Rift Region, Kenya

The Impact of Firm Risk and the COVID-19 Crisis on Working Capital Management Strategies: Evidence from a Market Affected by Economic Uncertainty

The present study aims to investigate the impact of the COVID-19 crisis and firm risk on working capital management policies among manufacturing firms listed on the Tehran Stock Exchange (TSE). The study sample consists of 1200 observations and 200 companies listed on the TSE over a six-year period from 2016 to 2021; furthermore, the statistical method used to test the hypotheses is ordinary least squares (OLS). The results show that the COVID-19 pandemic has led managers to increase current assets to total assets ratio (CATAR), current ratio (CR), quick ratio (QR), net working capital (NWC), cash to current assets (CTCA) ratio, while it has caused a decrease in operational cycle (OC), days account receivables (DAR), and current liabilities to total assets ratio (CLTAR). Furthermore, we find that the higher the company’s risk, the more managers are motivated to embrace the working capital investment policy, net working capital, cash to current assets ratio, and cash conversion efficiency (CCE). In general, our findings indicate that during times of crisis, Iranian companies tend to adopt conservative working capital policies to ensure sufficient liquidity to respond appropriately to unforeseen events. In this study, the theory of liquidity preference aligns with the observed behavior of firms in response to the COVID-19 crisis and firm risk, where the emphasis on liquidity and short-term financial stability becomes paramount.

A liquidity preference approach to nonfinancial corporate liquid asset holdings

This paper examines the long-run pattern of the U.S. nonfinancial corporate sector’s liquid financial asset holdings in the period from 1951 to 2018. My approach to examining this pattern builds from the banks’ liquidity preference theory put forward in Keynes’ 1937 papers, as well as Minsky’s 1957 paper discussing the role of financial innovation in the banks’ management of liquidity preference. I argue that financial intermediaries affect nonfinancial corporations’ liquid asset holdings through two primary money creation channels: (1) banks’ commercial and industrial loans advanced to nonfinancial corporations and (2) the liquidity premium of financial intermediaries, which can be measured by the interest rate spread in the intermediaries’ liabilities markets. Through theoretical and empirical exercises, I find that these two endogenous liquidity creation channels have been the important factors accounting for liquid asset accumulation by the nonfinancial corporate sector. Overall, my results suggest that financial innovations, structural changes of the U.S. financial system, and financial intermediaries’ liquidity premium could contribute to our understanding of the shift in nonfinancial corporations’ asset portfolio composition in favor of liquid financial assets.

WORKING CAPITAL MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF DAIRY PROCESSING FIRMS IN KENYA

The significance of the dairy sector in Kenya’s economy cannot be over emphasized. This is because the sector contributes 4% of the national gross domestic product and 19% of the agricultural gross domestic product for an economy that heavily relies on agriculture. Working capital plays a critical role in the success of commercial entities. This study sought to determine the effect of working capital management practices on the financial performance of dairy processing firms in Kenya. The general objective of the study was to determine the effect of working capital management practices on financial performance of dairy firms in Kenya. The specific objectives of the study were to establish the effect of inventory management practices, debtor’s management practices, creditors’ management practices and cash management practices on financial performance of dairy firms in Kenya. The theories that guided the study are; Keynesian liquidity preference theory, Cash Conversion Cycle theory, Stewardship theory, Risk return trade-off theory and Transaction Cost Economics Theory. The study population comprised the 221 dairy processing firms classified as major and mini processors by the Kenya Dairy Board. Stratified random sampling technique was used to select a sample size of 69 firms for the study. Self-administered structured questionnaire was used for data collection. A pilot study was conducted to test for the validity and reliability of data measuring instruments. Descriptive statistics namely mean, variance and standard deviation, and inferential statistics namely, correlation, simple and multiple regression was used for data analysis. The results of the analysis were presented using tables. The diagnostic tests to be performed in the study included Normality, Linearity and Multi - collinearity. A statistical package for social sciences software was used to aid the data analysis. Results indicated that inventory management was a key predictor of financial performance. Results indicated that debtor’s management practices were a key predictor of financial performance. Correlation outcomes of the results showed that credit management, and cash management had a positive and statistically significant relationship with the financial performance of dairy firms in Kenya. The regression results showed that cash management and creditors management have a direct positive effect on the financial performance of dairy firms in Kenya. The study recommended that Dairy Firms directors should develop a policy on credit collection detailing the policies and practices to be followed by the Dairy Firms. To enhance their accounts receivables and remove bad debts while boosting sales and inventory turnover, farm owners should rigorously follow up on debts, assess consumers before providing debts, give incentives for early debt payments, and build a solid debt management strategy. Dairy Firms may generally keep the standard payment interval longer than the average collection period to limit receivables payments for short-term needs, lowering finance expenses.

Static term structure of interest rate construction with tension interpolation splines

<abstract><p>Traditional theories of term structure of interest rate consist of four major classical theories, including Pure Expectation Theory, Liquidity Preference Theory, Preferred Habitat Theory and Market Segmentation Theory. However, they cannot be well interpreted by the traditional static term structure of interest rate methods such as polynomial spline and exponential spline. To address problems on low precision and weak stability of traditional methods in constructing static interest rate term structure curve, in this paper, we introduce the tension interpolation spline based on a fourth-order differential equation with local tension parameters calculated by Generalized Reduced Gradient (GRG) algorithm. Our primary focus is to illustrate its better prediction effect and stability with an empirical study conducted using datum of treasury bonds. Then, we divided the datum into intra-sample datum for estimating tension parameters and out-of-sample datum for evaluating their robustness of predicting stochastics collected from Shanghai Stock Exchange on $ {2^{{\rm{nd}}}} $ February, 2019. According to the principle of total least squares and total least absolute deviations, the result shows that the tension interpolation spline model has better precision and stronger stability in prediction of out-of-sample treasury bonds prices compared with the model established by polynomial spline and exponential spline. In addition, it can better explain the Liquidity Preference Theory, which confirms that it is suitable for constructing the static term structure of interest rates in the securities exchange market.</p></abstract>

Effect of Cash Ratio on Financial Performance of Agricultural Firms Listed at the Nairobi Securities Exchange, Kenya

The study was informed by the continuous decline in financial performance of the agricultural firms listed at the Nairobi Securities Exchange, Kenya. The study emanates from the Doctoral dissertation of the first author in which the co-authors served as supervisors. A census approach was adopted where secondary data from audited annual financial reports of all the six Agricultural firms listed at the Nairobi Securities exchange, Kenya was used, covering the period 2015 to 2022. Descriptive analysis and panel regression analysis were applied. Based on the outcome of the panel regression analysis, the study established that cash ratio has significant effect on financial performance of the Agricultural firms listed at the Nairobi Securities Exchange, Kenya. The study recommends that agricultural firms listed at the Nairobi Securities Exchange need to improve on their cash and cash equivalents holdings so as to easily address current liabilities when due. This will in turn sustain the financial performance of agricultural firms listed at the Nairobi Securities Exchange, Kenya. Additional research can be done using a different method of analysis to further investigate the relationship between cash ratio and financial performance of agricultural firms listed at the Nairobi Securities Exchange, Kenya. Keywords: Agricultural Firms, Cash Ratio, Financial Performance, Liquidity Preference Theory and Stewardship Theory

Firm Characteristics and Financial Distress among Manufacturing Firms Listed at Nairobi Securities Exchange Kenya

Businesses including companies listed on stock markets strive to predict financial distress to ensure they manage the factors that could potentially lead to such distress. It is however not clear how the various factors affect financial distress particularly firm size; firm activity levels; firm financial leverage; and profitability given that these are some of the biggest determinants of the financial condition of a business. The lack of clarity results from the fact that there are numerous models of financial distress with each providing varying factors some often contradicting each other. It is therefore critical to evaluate how these affects financial distress among manufacturing firms listed at Nairobi Security Exchange (NSE). This study aims to evaluate how firm size, turnover, leverage and profitability influence financial distress as measured by the B-Ratio. This census survey with a population of 13 companies covers the period 2013 to 2022. Three companies however did not meet the data criteria and were therefore excluded from the analysis. This left 100 firm-year observations. The study utilized four theories of financial distress that include neoclassical theory of investment; liquidity preference theory; pecking order theory; and Wreckers theory of financial distress. The study used panel regression analysis to test the hypotheses that firm size, turnover, leverage and profitability have no significant influence on financial distress. Hausman model specification test revealed that the fixed effects panel regression model was the most appropriate for analysis and it was subsequently used in arriving at the inferential findings. T-test and p-value at 95% confidence interval were used in hypotheses testing. All the four hypotheses set for the study were rejected and it was concluded that size, activity, leverage and financial performance are significant determinants of financial distress. The findings reveal that whereas firm size (as shown by firm capitalization ratio), firm activity level (as shown by total asset turnover) and firm profitability (as shown by return on equity) all had a negative effect on B-ratio, financial leverage had a direct positive effect on financial distress. The study was limited to the 10 qualifying companies at the NSE and has suggested that similar studies could be expanded to non-listed companies, listed nonmanufacturing companies as well as with the use of different models such as hazard models.

The effect of Asset quality on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to determine the effect of asset quality on commercial banks value in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Asset Quality has a positive impact on the commercial banks value in Kenya. The study concludes that banks should improve their asset quality by adopting effective risk management strategies and banks to improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies. The study recommends the banks to improve their asset quality by adopting effective risk management strategies.

The effect of capital adequacy on the Value of Commercial Banks in Kenya

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to establish the effect of capital adequacy on value of commercial banks in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Capital adequacy has a positive impact on the commercial banks value in Kenya. The study concludes that financial soundness indicators such as capital adequacy are more important in determining the ability of a bank to produce value for its share-holders. The study recommends banks to improve their capital adequacy by retaining profits or raising new capital through various means such as issuing new shares, selling assets, or borrowing from financial institutions. Additionally, banks to improve their asset quality by adopting effective risk management strategies and banks should improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies.

The role of money and financial institutions in Kalecki and Keynes

Numerous discussions on money and financial institutions have been advanced both between and within economic theories. Heterodox schools of thought consider money to be non-neutral, with causality running from money demand to money supply and the interest rate as a monetary and distributive variable. In this paper we discuss the views of Michał Kalecki and John Maynard Keynes on money and the operation of financial institutions. Kalecki and Keynes formulated the theory of effective demand, specifically in terms of its effects on economic growth and financial instability. Nonetheless, in line with the work of Tracy Mott, we argue that Kalecki’s analyses of the financial system are more profound because they better capture the complexity of the oligopolistic financial system, providing the foundations for Keynes’ liquidity preference theory. As a result, it may be concluded that the main problem of economic growth and investment spending is the structure of corporate finance.

Effects of Debtors’ Management on Financial Performance of Savings and Credit Cooperative Organizations in Nandi County, Kenya

Savings and Credit Cooperative Organizations (SACCOs) are key components of the economy and social development. However, it’s experiencing both internal and external issues that should be handled. The study attempted to identify the effects of business financial parameters on the performance of SACCOS in Nandi County. Specifically, the study investigated the effects of the management of loan debtors on the financial performance of SACCOs in Nandi County. The study was guided by liquidity preference theory, human capital theory, efficient structure theory, and Pecking order theory. The study used a descriptive research design to examine all the influences on financial performance. The target population was therefore all the ten SACCOS in Nandi County registered and licensed as of January 2023, where eighty-seven employees were randomly sampled to participate. The primary sources of data collection used in data collection were structured questionnaires as the main tool. Content validity was used to determine the validity, while Cronchbach’s alpha coefficient was used to determine the reliability of the research instrument. The data was analyzed using both descriptive and inferential statistics. For descriptive statistics, tables and narratives were used, and for inferential statistics, correlations and regression analyses were used. The Statistical Package for Social Sciences software (SPSS) helped with data analysis. The study findings indicated that there was a positive and significant effect of loan debt management on the performance of Saccos in Nandi County (t = 9.833, P < 0.05). The study recommended that Sacco management should maintain a credit policy manual to help in debt recovery and even avail the required resources needed for effective management of loan debtors.

Determinants of Stock Performance for Selected Asia-Pacific Economic Cooperation Countries (APEC)

Asia-Pacific Economic Cooperation (APEC) held its 27th summit in 2020 and emphasized facilitating trade and investment in the Asia-Pacific region. This creates trading opportunities for investors in the stock market, allowing for potential financial growth and economic development. However, it becomes a challenge for investors to participate in the stock market due to APEC consisting of multiple countries with different risks and opportunities. The main objective is to find, analyse and determine the independent variables that can potentially affect the stock performance of all selected APEC countries in a significant manner. The independent variables included in the study are stock volatility, inflation rate, real interest rate and market capitalization. The study uses underpinning theories to support the independent variables, including Dow Theory, Cost-Push Inflation Theory, Liquidity Preference Theory and Free-Float Methodology. A static panel analysis takes place following the Random Walk Model with the adjusted formula to fit the study. The results suggest that all four independent variables have achieved significant probability values for all selected APEC countries. The significant outcomes may be the result of integration and interdependence among APEC economies, which has indeed created opportunities for investors to gain an advantage over the stock market.

Effect of Capital Adequacy on Liquidity of Microfinance Banks in Kenya

The study sought to assess the effect of capital adequacy on the liquidity of microfinance banks in Kenya. The capital buffer theory and liquidity preference theory were employed for the investigation. The study used an explanatory research design and a positivist worldview. The 13 Kenyan microfinance banks that were operational between 2012 and 2018 were the demographic that was targeted. The study used a census methodology and concentrated on all 13 MFBs in Kenya. The study used secondary data from published financial statements and Central Bank regulatory reports. Descriptive analysis and panel regression analysis was used to analyze the data. At a significance threshold of 0.05, the hypothesis was tested. The study discovered that adequate capital has a substantial impact on Kenyan microfinance banks' liquidity. Notably, higher capital held above the minimum requirement depletes the liquidity levels of banks; hence, managers need to strike a balance between capital levels and optimum liquidity levels. This, in turn, will allow the Microfinance Banks to carry out other liquidity functions without interruptions emanating from rising capital adequacy.

Liquidity Capacity and Financial Performance of Commercial Banks in Kenya

Purpose: The objective of the study was to assess the impact of liquidity capacity on the financial performance of commercial banks in Kenya.
 Methodology: This study employed the explanatory research design. The 42 Kenyan commercial banks were the study's target population. The essential financial data for analysis was extracted and compiled using a data collection routine from the yearly reports. Panel data was mined from 42 commercial banks for six years between 2012 and 2018. The data were assessed by employing descriptive statistics as well as inferential statistics. Descriptive statistics employed involved the standard deviation, median, and average. Inferential statistics used involved panel regression. The data analysis was aided by STATA software.
 Findings: The findings from the regression analysis indicate that Net Stable Funding and Liquidity Coverage exert a significant positive impact on the financial performance of commercial banks in Kenya. Conversely, provisioning for Non-Performing Loans, Liquidity Gap, and Provisioning for Nonperforming Loans demonstrate a notable negative effect on the financial performance of commercial banks in the country. Moreover, the study reveals that bank competition plays a significant moderating role in the relationship between liquidity capacity and the financial performance of commercial banks in Kenya.
 Unique Contribution to Theory, Practice and Policy: The study was anchored on Anticipated Income Theory and Liquidity Preference Theory. The study recommended that the regulatory body for commercial banks, the CBK, facilitates open channels of communication between policy makers and senior management of commercial banks in Kenya. This discussion is critical to ensuring that the monetary policies developed are practical and beneficial to the expansion of the commercial banking industry. Lastly, the study suggests that all commercial banks in Kenya integrate considerations of liquidity costs, benefits, and risks into their performance measurement, pricing, and approval processes for significant business activities.