Firm-specific factors and share liquidity of 20 share index Constituent companies listed at the Nairobi Securities Exchange

Abstract

Listed firms at the Nairobi Securities Exchange (NSE) have encountered challenges regarding share liquidity, impacting market efficiency and the attractiveness of the NSE to investors. This study focuses on the effect of firm-specific factors on share liquidity, specifically examining the NSE 20 share index constituent companies. The factors considered include company size, financial liquidity, financial performance, and ownership structure. The study draws upon market depth theory, arbitrage pricing theory, and efficient market hypothesis and adopts a positivism philosophy with a longitudinal research design. The target population consists of firms listed in the NSE 20 share index from 2014 to 2021. Secondary data from company reports and NSE historical data were collected. The study employed preliminary analysis, descriptive statistics, and inferential analysis including correlation analysis and a random effects model. The study found that company size had no statistically significant effect on share liquidity in Kenya (β = 0.012, p = 0.53 for contemporaneous effects, and β = -0.002, p = 0.98 for lagged effects). However, financial leverage had a statistically significant effect on share liquidity, as indicated by the contemporaneous effects (β = 0.13, p = 0.005) and lagged effects (β = 0.155, p = 0.01). Company financial liquidity did not have a statistically significant effect on share liquidity in contemporaneous effects (β = 0.07, p = 0.245), but it showed a positive and significant effect after lagging the values by one year (β = 0.155, p = 0.001). The contemporaneous effects of financial performance were found to be negative and insignificant (β = -0.001, p-value = 0.249). However, by analyzing the lagged effects, a significant and positive relationship between EPS and share liquidity was identified, with a coefficient of 0.006 and a corresponding p-value of 0.02, which is below the conventional significance level of 0.05. The study concludes that financial leverage, company liquidity, and financial performance have a positive impact on the share liquidity of firms listed at NSE. However, the effects of these variables are observed with a one-year lag. The study recommends policymakers and regulators avoid assuming that larger companies are more liquid, and instead focus on implementing measures to promote liquidity, financial leverage, and good financial performance in both large and small firms. The study recommends further investigations into the effect of firm-specific factors on share liquidity in different market conditions.