Capital Adequacy Risk and Firm Market Value: Insights from Commercial Banks Listed at the Nairobi Securities Exchange

The Global financial crisis of 2008 exposed the danger of capital adequacy risk on the market value of commercial banks. Majority of the banks that lacked adequate capital to withstand the economic shocks eventually collapsed. The objective of this study was to assess the impact of capital adequacy risk on the market value of commercial banks in Kenya. The market value of commercial banks has been dwindling over time hence a sign of unstable performance. This study adopted a positivistic research philosophy where the research was detached from the study to ensure objectivity. Secondary data was obtained from the published financial reports of commercial and Nairobi Securities Exchange database. The study utilized a causal predictive model under partial least squares approach. Both the measurement and structural models were assessed for the validity of variables and testing of the hypothesis. Path analysis results revealed that capital adequacy risk has a significant negative relationship with the market value of commercial banks. This implies that with elevated levels of capital adequacy risk, commercial banks are exposed to economic shocks, regulatory compliance costs and insufficient capital to meet their operational performance and hence a declining market value. These results are consistent with new capital requirements under Basel III and in Kenya where banks are required to comply with the increased capital requirements. The mediating influence of profitability on the relationship between capital adequacy, risk and market value was also significant. The study recommends that the regulator should be cautious while implementing the new capital requirements to avoid cash trap and a reduction of credit supply. Keywords: Interest rate risk, market value, financial performance, commercial banks