The Relationship Between Free Cash Flows and Stock Returns of Firms Listed at the Nairobi Securities Exchange
Abstract
Nairobi Securities Exchange has experienced numerous agency conflicts especially
among shareholders and management. Free cash flow theory proposes the reduction of free
cash flows through debt and dividend payout to manage agency conflicts in a firm. The study
sought to establish the relationship between free cash flows and stock returns at the Nairobi
Securities Exchange (NSE). The study adopted a descriptive research design with the
population of the study comprising of all 62 listed companies at the NSE in the years 2009 to
2013. The study utilized secondary data from published audited financial statements of listed
companies as well as stock price data from the NSE. Data was analyzed using both correlation
analysis and multiple linear regressions and utilized Statistical Package for Social Sciences
(SPSS) Version 21.0. The study established a significant positive relationship between free
cash flows and stock returns at the NSE for the whole market and in four out of nine sectors
examined contrary to free cash flow theory. The study recommends that firms increase levels
of free cash flows as they are positively correlated with financial performance and stock
returns.
Publisher
University of Nairobi