Financial Constraints, Firm Size, Industry Growth and Investment Cash Flow Sensitivity of Non-financial Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

Financial constraint has been one of the key challenges facing firm growth in the world. Some of the existing literature in finance presents that FC can be used to measure ICFS while the rest is opposed to this position. This study sought to determine the relationship between financial constraints (Independent Variable, IV) and investment cash flow sensitivity (Dependent Variable, DV) of non-financial firms listed at the NSE for the period 2010-2019. Further, the study assessed the mediating effect of firm size on the relationship between IV and DV. Additionally, this study established the moderating effect of industry growth on the relationship between IV and the DV. Agency Cost, Pecking Order and Trade-off theories provided theoretical basis of this study. The study adopted positivism as the research philosophy while longitudinal survey design was used. The study embraced census survey. The population of the study consisted of 33 non-financial firms trading at the NSE consistently over the period of the study. Secondary panel data was obtained from the NSE data base and Economic Survey reports for 2010-2019. Baron and Kenny technique was used to test the moderating effect of industry growth on the relationship between the firm financial constraints and investment cash flow sensitivity. Diagnostic test for multicollinearity was conducted using VIF and Ordinary least squares model with panel corrected standard errors was used to deal with heteroscedasticity of the error variance. The study concluded a significant financial constraints and ICFS relationship with reference to NSE non-financial firms and further size of the firms and industry growth also showing a relationship that is significant on how financial constraints and ICFS relate. The government should develop fiscal and monetary policies favorable for firms to trade profitably for this reduces over dependence on short term debts. The findings of this study are expected to guide managerial practitioners in the corporate sector to appreciate the integration of the various financing methods in the face of a challenging economic environment, and management of firm core processes in order to support entrepreneurial spirit in the country. Based on the results of this study, the government through Capital Markets Authority (CMA) and other stakeholders in the Kenyan corporate sector should develop appropriate policies in an attempt to organize the debt capital market to enable Kenyan corporate bodies get access to low cost long term debt capital to finance their investments and operations. The study recommends further studies on financial firms to address the puzzle, since there exists literature opposed to these findings.