Relationship Between Free Cash Flows and Stock Prices of Non Financial Firms Listed at the Nairobi Securities Exchange

Abstract

The motive of this study was to investigate the relationship between free cash flows and stock prices of non-financial firms listed at the Nairobi Securities Exchange. There exists various arguments concerning free cash flow and whether it is a good value driver when it comes to explaining the volatility of stock prices as compared to different value drivers such as dividends or earnings which are vital factors for investors seeking stocks in various companies however, when a firm is able to generate cash it shall increase the growth of these factors. A firm having strong free cash flows is able to develop new products, increase its dividends, venture into new markets, and pay off its liabilities. Analyzing a firm’s free cash flow brings to light proper management of the overall firm operations such as production, inventory control, sales, accounts receivables management and capital expenditures. Screening for firms having attractive levels of stock price to free cash flows provides a vital technique to portray mature stock values. The study focused at determining the relationship between levels of free cash flows and stock price that measure the value of stocks of non-financial financial firms listed at the Nairobi securities exchange. The population of the study focused on all forty two non-financial firms listed at the NSE in the years 2011 to 2015. Data was obtained from annual statements of non-financial listed firms, journal articles, publications and reports published by the institution under study (Nairobi Security Exchange). Multiple linear regression was used to identify the existence of the relationship. The regression model portrayed that Free cash flow has a positive effect on stock prices. This study used eight variables as the measures of ascertaining the relationship between free cash flows and stock prices.