The Relationship Between Free Cash Flows and Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Nairobi Securities Exchange has experienced numerous agency conflicts especially among shareholders and management. Free cash flow theory proposes the reduction of free cash flows through debt and dividend payout to manage agency conflicts in a firm. The study sought to establish the relationship between free cash flows and stock returns at the Nairobi Securities Exchange (NSE). The study adopted a descriptive research design with the population of the study comprising of all 62 listed companies at the NSE in the years 2009 to 2013. The study utilized secondary data from published audited financial statements of listed companies as well as stock price data from the NSE. Data was analyzed using both correlation analysis and multiple linear regressions and utilized Statistical Package for Social Sciences (SPSS) Version 21.0. The study established a significant positive relationship between free cash flows and stock returns at the NSE for the whole market and in four out of nine sectors examined contrary to free cash flow theory. The study recommends that firms increase levels of free cash flows as they are positively correlated with financial performance and stock returns.