Effects Of Financing Decisions On Total Productivity Of Non-Financial Firms Listed At The Nairobi Securities Exchange

ABSTRACT

The importance of a firm’s productivity cannot be overemphasised as it not only results in the growth of firms but also contributes to the overall growth of an economy. More than half of the variation in economic growth across different countries is said to be explained by differences in total factor productivity arising from the firm level. One major challenge facing developing economies, including Kenya is extremely low productivity level at the firm. Studies have pointed to innovation as a critical factor in determining a firm’s productivity. However, investment in innovative activities such as research and development are subject to the financial position of the firm, which is dependent on financing decisions taken by firms’ management. Financing decision could thus be a major underlying factor affecting firms’ productivity. However, the link between financing decisions and firms productivity has been scarcely researched even though it could help in informing financial policies that boost firms’ productivity. It is against this backdrop that the study sought to explore the effect of financing decision on the productivity of non-financial firms listed at the Nairobi Securities Exchange. The study objectives were to measure the productivity of non-financial firms listed at the NSE and to determine the effect of leverage and liquidity on the productivity of non-financial firms listed at the Nairobi Securities Exchange. The study was anchored upon Solow residual growth accounting theory where total factor productivity was obtained from the residual of the production function. Secondary data with a panel of 34 non-financial firms listed at the Nairobi Securities Exchange covering the period 2008-2017 was retrieved from the Nairobi Securities Exchange library for analysis. A panel regression model, was adopted with Feasible general least squares used as the estimation technique after Hausman test was conducted. Total factor productivity was then regressed against the firm’s leverage, liquidity and other control variables such as size and industry. The average of total factor productivity of non-financial firms listed at the NSE was found to be 1.04, which is an indication of low productivity. Leverage was found to have a significant positive effect on the productivity of non-financial firms listed at the Nairobi Securities Exchange. Liquidity was determined to have a significant positive effect on the productivity of non-financial firms listed at the Nairobi Securities Exchange. The results obtained from the study showing low productivity levels of firms is an implication that firms should move from factor accumulation to factor effectiveness to boost their productivity. The study results showing a positive effect of liquidity on productivity implied that firms should adopt an aggressive working capital approach in financing its productive activities. The positive effect of leverage on productivity implies that debt is a good source of funding productive investment activities and should be used more by the firm. Other implication of the study points to the government, financial institution and capital markets contribution to firms’ productivity by availing more debt capital to firms to go towards investment in productive activities.