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

David Haritone Shikumo, Oluoch Oluoch+1 more|RePEc: Research Papers in Economics|Oct 1, 2020

Working Capital and Financial Performance4 citations

TL;DR

This study examines the impact of short-term debt on financial growth in 45 non-financial firms listed on the Nairobi Securities Exchange (NSE) from 2008 to 2017 using panel data analysis. It finds that short-term debt significantly and positively influences both earnings per share and market capitalization growth, explaining 45.99% and 25.6% of variation respectively, supporting its role in enhancing firm value.

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.

Motivation & Objective

• To assess the effect of short-term debt on financial growth of non-financial firms listed on the Nairobi Securities Exchange.
• To address declining financial performance and reduced investor confidence in NSE-listed firms.
• To examine whether short-term debt can serve as a strategic financing tool to enhance firm value and stakeholder benefits.
• To apply Agency Theory and the Theory of Growth of the Firm as theoretical foundations for the analysis.

Proposed method

• A descriptive statistics and panel data analysis were conducted on a dataset of 45 non-financial firms listed on the NSE from 2008 to 2017.
• The study employed a fixed-effects model to estimate the relationship between short-term debt and financial growth metrics.
• Financial growth was measured using two proxies: growth in earnings per share (EPS) and growth in market capitalization.
• The analysis controlled for firm-specific characteristics and used robust standard errors to ensure reliable inference.
• The study excluded financial firms due to sector-specific regulatory and operational differences.
• Theoretical frameworks—Agency Theory and the Theory of Growth of the Firm—guided the model development and interpretation of results.

Experimental results

Research questions

• RQ1 To what extent does short-term debt influence the financial growth of non-financial firms listed on the Nairobi Securities Exchange?
• RQ2 How does short-term debt affect earnings per share growth in NSE-listed firms over the 2008–2017 period?
• RQ3 What is the impact of short-term debt on market capitalization growth in the same sample of firms?
• RQ4 Does short-term debt have a statistically significant and positive effect on firm value creation as measured by financial performance indicators?

Key findings

• Short-term debt explains 45.99% of the variation in earnings per share (EPS) growth among non-financial firms listed on the Nairobi Securities Exchange.
• Short-term debt accounts for 25.6% of the variation in market capitalization growth over the 2008–2017 period.
• The positive and statistically significant relationship between short-term debt and EPS growth indicates that short-term financing enhances profitability and earnings performance.
• The positive and significant effect on market capitalization growth suggests that short-term debt contributes to firm value appreciation and investor confidence.
• The findings support the use of short-term debt as a strategic financing tool to improve firm performance and stakeholder value.
• The study concludes that prudent use of short-term debt can significantly enhance financial growth in non-financial firms listed on the NSE.