Abstract
The purpose of the study was to establish the effect of financing cash flow on stock return and to test the moderating effect of discretionary accruals on the relationship between financing cash flow and stock return. Panel data was collected from 29 listed non-financial firms at NSE for 12 years from 2007-2019. Fixed effect hierarchical regression analysis showed that financing cash flow had a positive and significant effect on stock return while discretionary accruals negatively moderate the relationship between financing cash flows and stock returns. The study concludes that financing cash flow improves stock return, however, high discretionary accruals adversely reduce the effect of financing cash flow on stock return. Therefore, the study recommends that NSE should enact incisive regulations pertaining to discretionary accrual practices and its implication on stock return to protect investor vulnerability to losses in their investment due to managers’ opportunistic behaviours.
Highlights
Stock return is a field of study which has sparked the interest of many academics in the recent years
The summary of descriptive statistics for stock return, financing cash flow and discretionary accruals, firm size and firm age are highlighted in Table 2 below
From the table the standard deviation was 1.9 meaning that the stock returns fluctuated uncontrollably among the nonfinancial firms listed in the NSE between 2008 and 2009.These results report that Financing cash flows had a mean of 0.035 with a minimum value of -9.785 and a maximum of 12.457 during the period.This means that there were no major cash outflows towards financing of fixed assets and huge capital outlay for projects
Summary
Stock return is a field of study which has sparked the interest of many academics in the recent years. According to Ardian et al, (2014) financing cash flow statement contained in the annual financial reports is the source of information that proclaims the capability of the firm to generate positive financing cash flows and profitability trend in the future can influence investors’ judgments to invest in the stock market. Market efficiency theory points that when financial results of a firm are announced, some speculations appear that influence stock prices. This was affirmed by Corhay, et al, (2015) in their studies that revealed that publicly announcing financial results on the US market leads to a significant variation of stock returns immediately. The main objective of a firm is to maximize shareholders wealth managers are likely to apply discretionary accrual (DA) practices to create a positive impression regarding the future performance of the firm’s shares
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