Effect of Cash Holding on Value of Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

This study focused on ascertaining the effect of cash holding on value of non-financial firms listed at the NSE. The population for the study was all the 47 non-financial firms listed at NSE. Out of the 47 firms the research only managed to get data from 43 firms which was an equivalent of 91.49% response rate. The independent variables for the study were cash holding as measured by the ratio of cash and cash equivalents to total assets, age of a firm as measured by the Ln of the number of years in existence, firm size as measured by Ln of total assets and capital structure as measured by debt ratio. Firm value was the dependent variable and was measured by the ratio of market value of equity to book value of equity. Annual secondary data spanning 5 years for the time frame January 2014 to December 2018 was collected and analyzed through the assistance of SPSS software version 22. Multiple linear regression model was adopted to determine the association of variables. From the results of the analysis an R-square value of 0.140 which suggested that about 14% of the changes in value of listed non-financial firms at the NSE can be related to the four chosen independent variables while 86% in changes in financial performance can be related to other variables not incorporated in this model. Further findings found out that at the independent variables had a moderate correlation with value (R=0.374). The F statistics from the ANOVA outcomes was significant at 5% with a p=0.000. Consequently, it was considered that the model is suitable in explaining the chosen variables relationship. The outcomes additional revealed that both cash holding and firm size produced positive and statistically significant values for this study while capital structure produced negative but statistically significant values. Age of the firm was found to be an insignificant determiner of firm value. The study recommends that when firms are coming up cash holding levels, they should weigh between the value maximizing benefits of holding cash and opportunity cost of holding idle assets. Cash holding has been found to increase firm value and so policy makers should ensure that firms maintain cash holding at sustainable levels to maximize firm value.