Financial Flexibility And Corporate Investment Among Non Financial Companies Listed On NSE, Kenya

ABSTRACT

The existing evidence indicates that listed companies on the Nairobi Securities Exchange Kenya are financially flexible. However, these firms have not managed to undertake corporate investments of the magnitude achieved by other countries where firms are financially flexible. Previous studies have shown that financial slack, spare debt capacity and dividend decisions directed at maintaining financial flexibility in corporate entities can enhance investment ability of the firms. This disparity therefore motivated this study which sought to link the measures of financial flexibility and corporate investment in the Kenyan context between 2002 and 2013. This study therefore sought to establish the effects of debt capacity, cash holdings, and dividend decisions on corporate investments. The study further sought to establish the moderating effects of ownership concentration on the relationship between financial flexibility and corporate investment. The pecking order theory underpins this thesis since the management of companies have to make investment decisions based on the financial resources available both from internal and external sources with a view of maximizing the wealth of the shareholders. The respective variable indicators were used to determine the effects. Explanatory and non experimental research design was used to fulfill the research objectives. All 28 non financial companies listed on the NSE and fulfilled the set conditions in the period under the study were considered. Secondary panel data collected was sourced from annual financial reports of quoted companies and records maintained at Nairobi Securities Exchange. The study applied panel data model (fixed effects) based on the outcome of Hausman specification tests to determine the effects of financial flexibility on investment decisions of non financial listed companies on NSE, Kenya. Feasible generalized Least Square regression results revealed that leverage and asset tangibility being indicators of debt capacity had a positive association with investment decisions. Free cash flow, an indicator of cash holdings, had positive relationship with investment decisions whereas; profitability an indicator of dividend decisions had positive relationship with investment decisions. The study also found out that the moderating effects of ownership concentration on the relationship between financial flexibility and investment decisions had no effect. The study recommends that managers of listed non-financial companies should maintain accumulating reserves of borrowing power that allows them to have a better access to the capital market when faced with positive shocks to their investment opportunity. The study also recommends that managers of non financial listed companies should increase free cash flow as it has been established that investment ability of these companies rely heavily on it. Having established that free cash flow increases the ability to invest, there is need to carry out further study in order to establish whether the investments undertaken are value adding or whether they are just an expression of empire building.