The Relationship Between Free Cash Flows and Investments of Firms Quoted at the Nairobi Securities Exchange

Abstract

The aim of this study was to establish the relationship between free cash f low and investments of companies listed at the Nairobi Stock Exchange. Companies engage in various ways to finance their investments, including equity financing (internally generated funds and externally raised funds) and or debt. Free cash flow tempts managers to expand the scope of operations and the size of the firm, these spending is seen as unprofitable especially to the shareholders, who see it worthwhile for the firm to issue dividends instead of retaining the funds to invest. Capital expenditure is strongly and positively associated to the level of free cash flow (the more free cash flows a firm has, the more investments the firm can engage in. The study aimed at determining the relationship between the level of free cash flow and the amount of extra cash that can be committed on investment decisions by companies that are listed at the Nairobi Stock Exchange. Data was obtained from annual statements of listed companies. The study covered a five year period from 2009 to 2013. Multiple linear regression method was used to identify the existence of the relationship. The regression model results point out that FCF have a positive impact on Net Capital Expenditure. From the organizations considered, it was established that there is a positive fairly significant relationship between free cash flows and investment that is as the level of free cash flows increase, the level of investments increases. This study used only three variables as the measures of the relationship between free cash flows and investments, hence there is need to carry out the study with other different factors in order to be able to establish whether there are other major factors that have a relationship with investments at the NSE and in companies not listed at the NSE