Effect of Cashflow Volatility on Value of Non – financial firms listed at the Nairobi Securities Exchange

Abstract

Volatility of corporate cash flows exacerbates reduction in investments, increases external cost of finance and adversely affects firm value. There is a dearth of studies on cash flow volatility, and its impact on firm value and extant literature provide mixed findings. This study sought to examine the relationship between cash flow volatility and value of nonfinancial companies. A census survey was conducted on a population of 42 nonfinancial companies listed at the Nairobi Securities Exchange for the period 2002 to 2019. Secondary data was collected from 36 companies which had consistent listing for at least three consecutive years. Random Effects model robust for standard errors was applied to analyse the data. Results from hypothesis testing showed an inverse and statistically significant relationship between cash flow volatility and firm value. The study cautions management to monitor closely their operational costs and enhance risk management measures to minimize cash flow volatility which impacts negatively on firm value.

Keywords: Cash flow volatility, firm value, information asymmetry, panel random effects model.