Effect Of Financial Soundness On Firm Value Of Listed Commercial Banks In Kenya

Abstract

In any given country, banking sector is a key element in boosting economic development. A stable and viable banking sector leads to effective performance and regulates flow of the money hence encouraging economic growth in any given country. In Kenya, the banking sector is prone to both internal as well as external risks and uncertainties that threatens its performance and sustainability. Over the last few years, commercial banks in the country have been recording poor performance especially in terms of their profitability. Based on this fact, the key aim of this research study was to examine the impact of financial soundness on firm value of listed commercial banks in Kenya. This is because, undertaking this study would provide commercial banks with significant and detailed information on how to sustain their financial stability based on the competitive environment in which they operate. Specifically, the current study was guided by the following objectives; to establish the effect of bank liquidity, capital adequacy, credit risk management and earnings on firm value of listed commercial banks in Kenya. A descriptive study design was adopted for the purpose of this study. The study population comprised of the eleven (11) publicly listed commercial banks at NSE using census. Secondary data obtained from the CBK as well as other published financial reports of the targeted 11 commercial banks were used. The period which the current study aimed to investigate was the last ten financial years from 2009 to 2018. Some of the preliminary tests that were conducted on the data included Shapiro Wilks tests of normality, and Hausman tests. Diagnostic post estimation tests included test for multicollinearity and heteroskedasticity tests. From the results of the fixed effects panel data, it was established that capital adequacy was the only variable that had a statistically significant influence on a firm value. Asset-quality had the highest positive regression coefficient of 23.8494. Yet another aspect of financial soundness that had a positive influence on value included earnings with a coefficient 0.6601, followed by bank liquidity with a coefficient of 0.5854. Capital adequacy yield and negative coefficient of - 0.1552, furthermore which was not statistically significant at 5% level. The findings of the study therefore provide crucial insights regarding various aspects of financial soundness and more importantly how the associate with the firm value of the selected organizations.