BUSINESS RISK, PROFITABILITY, ASSET STRUCTURE AND FIRM VALUE OF NON-FINANCIAL FIRMS LISTED IN THE NAIROBI SECURITIES EXCHANGE, KENYA
Anthony M. Musyimi - Department of Accounting and Finance, Kenyatta University, Kenya
Dr. James M. Gatauwa - Department of Accounting and Finance, Kenyatta University, Kenya
Dr. Carolyne J. Kimutai - Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
The declining and highly volatile firm value observed in the Nairobi Securities Exchange (NSE) among the non-financial companies over the last decade has raised concern among scholars and financial practitioners. The Kenyan securities market has undergone periods of decline in firm value among the non-financial firms listed in NSE as shown by reduction in Tobin’s Q values from a high of 4.64 in year 2015 to a low of 0.81 in year 2022. Firm’s characteristics have long been linked with firm value. However, there has not been a consensus amongst empirical studies on the effect of firm characteristics variables including business risk, profitability and asset structure on firm value. This study investigated on business risk, profitability, and asset structure and firm value of non-financial firms listed in the Nairobi Securities Exchange, Kenya. Study objectives covered; examining the effect business risk, profitability and asset structure on firm value of non-financial firms whose shares trade publicly on NSE. The study was anchored on Enterprise Risk Management Theory and financial constraint theory. The study adopted positivist philosophy and explanatory research design. The target population was all the 39 non-financial companies recorded in NSE, Kenya as at 2016.The study used secondary data that was collected from the audited financial statements for the period 2016-2022. Panel data analysis was used to determine the relationship. Data analysis was run on the Stata 13 package and findings presented in tables while delivering conclusions and recommendations for the study findings. The study findings showed that business risk (p=0.004, <0.05) profitability (p=0.003, <0.05) and asset structure (p=0.021, <0.05) had statistically significant impact on firm value. Profitability and asset structure had positive significant effects while business risk had negative significant effects. The study established that business risk can positively impact firm value through the potential for higher returns. However, care should be taken on amount of risk taken to avoid financial distress. The profitability allows the company to have a strong financial position. Companies with a strong asset structure typically have a higher proportion of tangible assets. The study advocated that firms should manage business risk through diversification. The firms should enhance their profitability by implementing cost-reduction approaches and reflect on contracting subsidiary activities to minimize overhead expenses. The firms should spread their asset portfolio like real estate, stocks, bonds, and commodities to reduce their exposure to any one particular asset class.