Liquidity Optimization, Asset Tangibility and Financial Stability of Non-Financial Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

Financial stability enables firms to sustain operations, maintain adequate liquidity and withstand unexpected financial shocks. However, non-financial firms listed at the Nairobi Securities Exchange have faced financial stability challenges reflected by declining operating cash flows, cash ratios, and profitability between 2016 and 2024. These challenges underscore the importance of effective liquidity Optimization in strengthening financial resilience. The objective of the study was to examine the effect of liquidity optimization on financial stability of non-financial firms listed at the Nairobi Securities Exchange, Kenya as well as the moderating effect of asset tangibility on the relationship between liquidity optimization and financial stability. The study was anchored on cash management theory supported by liquidity preference theory. Descriptive and causal with cross-sectional research designs were adopted on a target population of 38 non-financial firms listed at the NSE using census approach. A data collection checklist was used to collect secondary data for the five-year period 2021-2025. Final population of 30 non-financial firms with complete data for a period of five years was aggregated to produce cross-sectional data structure.  Pearson regression analysis was used to examine the the relationship between liquidity optimization and financial stability at a 5% significance level. Diagnostic tests for Ordinary Least Squares assumptions utilized were Normality, Heteroscedasticity, Multicollinearity and Linearity. The study established a positive and significant effect of liquidity optimization on financial stability (β = 22.694, p=0.002 < 0.05). Further, a statistically positive non-significant moderating effect of asset tangibility on the relationship between liquidity optimization and financial stability (β = 21.86, p-value = 0.182 > 0.05). The findings indicate that effective liquidity optimization enables firms to balance short-term liquidity needs with productive resource utilization, thereby strengthening financial resilience irrespective of its asset structure. The study recommends that firms maintain optimal liquidity levels to support financial stability, resilience and productive investment.

Keywords:       Liquidity Optimization, Financial Stability, Asset Tangibility, Non-financial Firms, Nairobi Securities Exchange.