Cashflow and Stock Market Prices: Evidence from Nairobi Securities Exchange

Abstract

Cash is usually at the beginning and end of the company operating cycle and cash reserves are important for both passive hedging purposes and proactive investment purposes. This study aimed to assess the effect that cash flow has on stock market prices of companies listed at the Nairobi Securities Exchange (NSE). The research design employed regression and correlation analysis using four predictor variables. Secondary data covering the years 2010 to 2021 was obtained at the NSE and company financial reports. The study population was all NSE listed firms, and a sample of 10 companies was selected randomly from each segment. The study found that cash flow had an inverse relationship with stock prices, while profitability, liquidity, and debt had a positive relationship. Stock prices’ inverse relationship with cashflow supports the Free Cash Flow Theory while the uni-directional relationship with liquidity and debt contradicts the Irrelevance Theorem. The study recommends more focus on cash flow while making investment decisions and further research to determine optimal levels of cash reserves for companies.

Keywords: Cashflow; Stock Market Prices; Nairobi Securities Exchange