The Relationship Between Free Cash Flows and Capital Expenditure of Manufacturing Firms Quoted at the Nairobi Securities Exchange

Abstract

FCF has continuously raised more arguments especially in the capex determinants theory. Empirically, cash flow and investment are certainly related but much of the debate arises on the strength and its cause. Much of the studies have been done for developed countries while there have been limited studies relating to capex decisions that have been completed in developing countries which this study aims to address. A study of relationship between investments and FCFs for companies listed at the NSE by Kinyanjui revealed a positive relationship between the two. Most of the recent theory opines a negligible impact of cash flow on investment although the disagreement on why cash flow and investment are linked still exists. The aim of this study was to determine the effect of FCFs on capital expenditure of manufacturing firms quoted at the NSE. The period under study covered five years between 2013 and 2017 and the population for the study was all the fourteen manufacturing companies quoted at the NSE. The independent variables for the study were FCFs, leverage, dividend payout ratio, firm size and liquidity. Capital expenditure was the dependent variable in the study. The study revealed that the five independent variables considered explained 64.6% of the variation in capital expenditure of manufacturing firms quoted at the NSE while 35.4% was explained by other factors not considered in the study. A correlation coefficient of 0.804 indicated that the independent variables had a strong correlation with capital expenditure of manufacturing firms listed at the NSE. The model’s F statistic was significant at 5% level with a p=0.000 thus the model was fit to explain the association between the selected variables. The study concluded that firm size produced positive and statistically significant values for the period under study. FCFs produced negative but statistically insignificant values while liquidity, leverage and dividend payout ratio asset were also found to be a statistically insignificant determinants of capital expenditure among manufacturing and allied firms’ quoted at the NSE. Normally, firms with higher FCFs should invest more on capital expenditure, however the negative relationship noted could be explained by the decline in the growth rate of manufacturing sector as a contributor to GDP growth from 5.6% in 2013 to 0.2% in 2017 (2018 Economic Survey) attributable to a myriad of economic challenges hence companies invested less.