Effects of Cashflow on Stock Market Prices of Companies Listed in the Nairobi Securities Exchange

Abstract

Cash is usually at the beginning and end of the company operating cycle. Cash reserves are important for both passive hedging purposes and proactive investment purposes. It is therefore an aspect of company financials that investors should include in the analysis while making investment decisions. The objective of this study was to find out the effect that cashflow has on stock market prices of companies listed in the Nairobi Securities Exchange. In order to achieve the study’s goal the research was designed to allow for regression and correlation of share prices to four predictor variables. Secondary data covering the period from 2012 to 2021 was collected from NSE database and company financial reports that were accessed online. The population was all companies listed in the Nairobi Securities Exchange. From the population, 10 companies were selected randomly from clusters representing each sector. Stock price was the dependent variable while cashflow was the independent variable with profitability (returns), liquidity and debt as control variables. Standardized stock prices were used to eliminate any effect of stock splits and bonus issues over the years. Cashflow coverage ratio was used as a proxy for cashflow. Multiple regression was used to determine the nature of the relationship between the dependent, independent and control variables. Results indicate that cashflow had an inverse relationship with stock prices while the other three regressors has a positive relationship. A unit change in cashflows results in a change of 0.438 units in the opposite direction. This lends credence to the Free Cashflow Theory which postulates that shareholders would rather be paid dividends than management holding cash reserves. A positive relationship between share prices and current and debt ratios contradicts the Irrelevance Theory which argues that company value is independent of its capital structure. The study recommends further studies to establish the optimal levels of cash that a company should hold based on its size.