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Kuria Stephen Maina - Jomo Kenyatta University of Agriculture and Technology, Kenya

Memba Florence - Jomo-Kenyatta University of Agriculture and Technology (JKUAT), Kenya

Oluoch Oluoch - Jomo-Kenyatta University of Agriculture and Technology (JKUAT), Kenya


Numerous factors influence investor perceptions about firm prospects and therefore market prices and the corresponding firm market capitalization. It is not clear if operating cash flow volatility is value relevant for companies listed at the Nairobi Securities Exchange (NSE). This lack of clarity arises from the conflicting theoretical and empirical evidence on the effect of operating cash flow volatility on market value. This study aimed to establish if the volatilities of cash flows from operations is a priced risk factor at the NSE. Market value was measured using the capitalization ratio while the operating cash flow volatility was based on the 3-year moving standard deviations of the operating cash flow ratios. The relevant theories that try to explain the interlinkage between operating cash flow volatility information with market values are the efficient market hypothesis, the functional fixation theory, the random walk theory and the MM value relevance theory. The research was undertaken as a census quantitative descriptive study based on a census of all the 66 listed companies. From these, 45 met the secondary data requirements resulting in 450 firm year observations for the 2011 to 2022 study period. After appropriate normality, autocorrelation and homoscedasticity tests, Hausman specification test demanded that the fixed effects panel regression model be used in the analysis. The test of hypothesis was done using the t-statistic and p-value at the 0.05 level of significance. The findings from the study revealed that the operating cash flow volatility had a negative effect on firm market value of the companies listed at the NSE. The study supports the EMH, Random Walk and MM value relevance theories but does not hold for the functional fixation theory. Since the study finds that operating cash flow volatility to be a priced information risk factor at the NSE, it recommends that more disclosures on information about operating cash flows should be reported among the items in the financial statements of listed companies in Kenya to aid investors in decision-making.

Full Length Research (PDF Format)