Effect of liquidity risk on shareholders’ wealth in commercial banks listed at the Nairobi securities exchange

Abstract

Shareholders’ wealth is among key decisions in a firm because it has a bearing on overall investor perception and firm value. There has been concern about declining value of shareholders’ wealth among commercial banks listed at the Nairobi Security Exchange (NSE). Previous studies have linked financial risk to shareholders’ wealth. Researchers however fail to agree on the magnitude and direction of the effect. It is not established how liquidity risk would affect shareholders’ wealth of commercial banks listed at the NSE. The objective of this study was to establish the effect of Liquidity risk on Shareholders’ wealth of Commercial Banks listed at the NSE. Descriptive research design was adopted. The target population was eleven commercial banks that had been constantly listed at the NSE from 2013-2019. A census was conducted to collect data from the eleven banks due to the smallness of the population. Data was collected using a checklist. Data was obtained from published financial statements and the Banking survey publications for seven years from 2013 to 2019. Data was analyzed using simple and multiple regression analysis with the help of SPSS version 25.0. Hypothesis was tested using t-statistic at 5% significance level. The study found that liquidity risk had a negative effect on shareholders’ wealth (regression coefficient -0.556, p-value of 0.023). Firms that have high liquidity have more cash flow and are able to take investment opportunities and hence increase shareholders’ value. Commercial banks should come up with ways of minimizing this risk.