The Effect of Cash-flow on Investments in Fixed Assets for Companies Listed at the Nairobi Securities Exchange

Abstract

The focus of the study was to determine the effect of cash flows on investments in fixed assets for companies listed at the Nairobi Securities Exchange. This was achieved by performing a regression analysis of the various variables considered to have an impact on investments: cash flows, sales growth and Tobin’s Q. The study covered the ten year period between 2003 and 2012. Secondary data on financial position, performance and cash flows was obtained mainly from the published audited financial statements of the companies and handbooks prepared by the Nairobi Securities Exchange between year 2003 and 2012. The market data was obtained from the Nairobi Securities Exchange. A reduced form investment model was used to test the relationship between cash flow and investment. The data was analyzed using Statistical Package for Social Scientists to obtain the regression coefficients over the ten year period while considering the year of observation, the industry group, age of the company, size of the company and the dividend pay-out ratio. The findings of this study suggest that cash flows have a positive effect on investments. A firm’s investment is likely to be affected by cash flows if it is young, small and is in agricultural, manufacturing & allied, construction & allied, automobile & accessories or energy & petroleum manufacturing & allied, construction & allied, automobile & accessories or energy & petroleum industry groups, relevant authorities should come up with policies aimed at hastening financial systems development in the country. Fully developed financial systems will go a long way in disassociating investments from cash flows and hence encouraging more small firms to take advantage of investment opportunities as they arise. In addition, measures should be put in place ensuring that the actual or perceived political risks in the country are maintained at minimum levels possible to increase the firms’ confidence in the country’s business environment (including the financial systems)