Determinants of Corporate Cash Holding Of Non-Financial Firms Listed In the Nairobi Securities Exchange

Abstract

Cash holding has received considerable attention worldwide due to concern that firms are holding ―too much‖ liquidity in spite of the fact that cash is a low return asset. Recent research has been centered on establishing whether firm characteristics determine its cash holding. This study was undertaken due to the mixed results in the findings in earlier studies carried out on the international scene and limited research on the subject locally. The main purpose of this study was to evaluate the determinants of cash holding for non-financial firms listed on the Nairobi Securities Exchange. Specifically, the study reviewed the effect of Market to book ratio (MTB), size, leverage, cash flow, interest rates and industry sector on the cash holding of nonfinancial companies listed on the Nairobi Securities Exchange. The study adopted a post-positivist approach. This study applied co-relational and non-experimental research design. A population of 44 nonfinancial firms listed on the Nairobi Securities Exchange for the period 2002- 2017 was undertaken. Secondary data was extracted from annual reports and financial statements while primary data was collected through self-administered questionnaires for management views on the determinants of cash holding from. Whereas a census review was adopted in the secondary data collection, a purposive sample of 168 senior executive was selected for primary data collection. The methodology applied was multivariate analysis using the OLS model with year and industry dummies and panel data model to test for the determinants of cash holding using the trade off, pecking order and the free cash flow theories. The study found that Market to book value has insignificant positive relationship with cash holding in the secondary study with most of the respondents in the primary study also negating the constructs that market to book ratio are positively related. The result of the test of the second hypothesis on the relationship between cash holding and size indicated a positive insignificant relationship the results of the primary study were in agreement with secondary study with respondents disagreeing with the statements proposing a negative relationship between cash and firm size. Regression analysis on the relationship between cash holding and leverage returned a significant positive relationship. Similarly in the primary study results majority respondents did not agree that leverage is negatively related to cash holding. Similar findings were reported on cash flow where secondary study findings suggested a positive and significant positive relationship between cash holding and cash flow from operations but the results from primary study did not concur with most the respondents not affirming the hypothesized relationship. Interest rates were found not to have a significant moderation effect on the relationship between cash holding and all independent variables. Primary study results indicated that interest rates was a significant determinant of cash holding. Finally industry sector was found to be a significant determinant of cash holding but does have a moderating effect on the relationship between cash holding and Cash flow and Leverage. Overall therefore the result indicate that cash holding is positively related to cash flow and leverage and its was further established that the cash holding of nonfinancial companies listed on the NSE, Kenya are not significantly related to the Market to book ratio and size of the firm. The study thus concluded that Market to Book ratio and Size are not significant determinants of cash holding of non-financial firms listed on the NSE. The study contributes to the literature on the determinants of cash holding and is useful to Managers in shaping their cash holding policies and Investors in establishing whether managers are making optimal cash management decisions. Further study is recommended on the relationship of cash holding and other firm characteristics such dividend payments, Board size, Sales ratio and working capital. It would also be useful for a study to be extended to Private firms to compare the results with the sample of public firms.