Cashflow Volatility, Corporate Investments and Value of Nonfinancial Firms Listed in Kenya

Abstract

Cashflow volatility causes shortages in cash leading to a reduction in investment expenditure and adverse impact on firm value. There is a scarcity of research on cashflow volatility and its effects on corporate investment and firm value. Existing studies yield mixed results, with the bulk of them emanating from advanced economies that are culturally and economically distinct from developing economies. This study sought to examine the influence of corporate investments on the link between cashflow volatility and firm value. A census survey was carried out on 42 nonfinancial firms listed in Kenya from 2002 to 2019 and secondary data obtained from 36 firms listed for at least three continuous years. Random effects panel regression model robust for standard errors was applied to analyse the data. Results from a four-step mediation analysis provided evidence of a mediating effect of corporate investments on the relationship between cashflow volatility and firm value. The study points the need for government and regulators to draw policies that provide a favourable working environment for businesses and advises management to actively monitor their operating expenses and strengthen risk management structures to mitigate cashflow volatility which adversely impacts investments and firm value.