FINANCIAL CONSTRAINTS AND INVESTMENT CASH FLOW SENSITIVITY AMONG NON-FINANCIAL FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Ithai Julius K; Ochieng, D.E; Nyamute, W.I; Omoro Nixon o

Ithai Julius K Assistant Lecturer, Meru University of Science and Technology
Ochieng, D.E Lecturer, University of Nairobi, School of Business, Department of Finance and Accounting
Nyamute, W.I Senior Lecturer, University of Nairobi, School of Business, Department of Finance and Accounting
Omoro Nixon o Lecturer, University of Nairobi, School of Business, Department of Finance and Accounting

Abstract

Abstract

Purpose: The purpose of the study was to establish the effect of financial constraints on the investment cash flow sensitivity of non-financial firms listed at the Nairobi Securities Exchange.

Methodology: The study employed descriptive and longitudinal research design and secondary data to study a population of 33 non-financial firms operating in Kenya and are listed at the Nairobi Securities Exchange. The data collected was analyzed through descriptive and inferential statistics.

Findings: The study findings pointed to a statistically significant positive relationship between profitability as an indicator of financial constraints and firm investment cash flow sensitivity. Firm liquidity and leverage as indicators of financial constraints were also positively related to investment cash flow sensitivity though the relationships were not statistically significant. Implications: The overall conclusion was that financial constraints positively influence the investment cash flow sensitivity of the non-financial firms. Specifically, firm managers rely on profitability to finance investments possibly because of financial market financing obstacles that include cost, access and information asymmetry. The positive effect of leverage and liquidity is a pointer to existence of pecking order preference in working capital and capital structure decisions.

Value: The study contributes to managerial policy in suggesting that corporate managers should increase the use of internally generated funds especially from profits and debt capital when financing their firm investment and operations in order to maximize the tax shield benefits available to their firms.