Investing Cash Flow Volatility and Firm Stock Market Value of the Companies Quoted at the Nairobi Securities Exchange

Abstract

There are a multiple number of determinants of investor perceptions about firm value which in turn influence demand for and supply of firm securities and therefore market prices and the corresponding firm market value as indicated by firm market capitalization. Extant literature reveals that it is not clear whether or not the volatility in the investing cash flows of a firm is priced information risk factor for companies listed at the Nairobi Securities Exchange (NSE). This lack of literature consensus arises from the conflicting theoretical and empirical evidence on the influence of such volatility on firm market capitalization. This study sought to establish if the annual fluctuations in cash flows from investing activities affects the market values of companies listed at the NSE. Market value was measured using the firm market capitalization ratio while the investing cash flow volatility was based on the 3-year rolling standard deviations of the investing cash flow ratios. The relevant theories that try to explain the interlinkage between investing cash flow volatility information with firm stock market valuations are the functional fixation theory; the random walk theory; the efficient market hypothesis and the MM value relevance theory. The research was undertaken as a census quantitative descriptive study based on all the 66 listed companies at the NSE. From these, 45 met the secondary data requirements resulting in 450 firm year observations for the 2011 to 2022 study period. Diagnostic tests for normality, heteroscedasticity, autocorrelation and model specification tests were undertaken. Hausman specification test provided a preference for the fixed effects model that was then used in the panel regression analysis. P-value and t-test were used in hypothesis testing at 95% confidence interval. The results of the study revealed that the volatility of the cash flows from investing activities had a negative influence on firm market valuation for the firms quoted at the Nairobi Securities Exchange. The findings support the MM value relevance theory; the Efficient Market Hypothesis and the Random Walk Theory but fail to support the Functional Fixation Theory. Since the study finds that the volatility in the cash flows from investing activities to be a priced information risk factor at the NSE, it recommends that more disclosures on information about cash flows in general and cash flows from investing activities in particular should be reported in the financial statements of listed companies in Kenya to aid investors in their investment decision making.