The existing evidence indicates that listed firms on the Nairobi Securities Exchange Kenya are financially flexible. However, these firms have not managed to undertake corporate investments of the magnitude achieved by other countries where firms are financially flexible. Previous studies have shown that financial slack, spare debt capacity and dividend decisions directed at maintaining financial flexibility in corporate entities can enhance investment ability of the firms. Corporate managers have lacked guidance on the efficient policies to adopt; that result in access to finance that enhances investment ability. Specifically, corporate managers have lacked proper guidance on the aspects of financial flexibility to rely on in terms of debt capacity, cash holdings and dividend decisions. It is against this background that this study sought to establish the effects of financial flexibility on corporate investment of non financial listed companies in Kenya. Descriptive research design was used in this study. A census of 28 firms non financial companies listed on NSE, Kenya was taken. Panel data of companies covering 2002 to 2013 was used in the analysis.
The first objective of the study was to ascertain the effects of debt capacity on corporate investments of non financial companies listed on NSE, Kenya. The study measured debt capacity in terms of financial leverage, asset tangibility and financial
distress. Using the FGLS estimation technique, the study established that there was significant positive relationship between increased used of leverage and corporate investment. Similarly, asset tangibility had a significant positive effect on corporate investments. It was apparent that as companies increased their long term debt and their tangible assets, levels of investments increases. However, financial distress had an insignificant positive effect on corporate investment. Financial distress was measured using Altman‟s Z score. It was apparent that companies‟ exposure to bankruptcy risks had no effects on their corporate investments.
The second objective was analyse the effects of cash holdings on corporate investments of non financial companies listed on NSE, Kenya. The study measured cash holdings in terms of free cash flows, firm size and earnings volatility. Free cash flow was measured by cash flow from operating activities minus capital expenditure to total assets. A high ratio indicates high levels of free cash flow by firms. The study established that corporate investments increased when companies reported presence of free cash flow. The company size was measured by the natural logarithm of total assets. A high logarithm indicates high company size and vice versa. The size of the company had no significant effects on the magnitude of investments companies made. It was apparent that as a company increases its size, cash holdings tended to be less and hence not vital in determining levels of investments.
Companies earning volatility was measured as standard deviation of operating cash flow to total assets. A high standard deviation indicates high instability in earnings. The study established that there was insignificant negative relationship between earnings
volatility and corporate investments of non financial companies listed on NSE. It was apparent that as a company faces uncertainty in its earnings from operations, the levels of corporate investment were affected insignificantly.
The third objective was to ascertain the effects of dividend decisions on corporate investments of non financial companies listed on NSE, Kenya. Dividend decisions were measured in terms of growth opportunity, profitability and dividend payout ratio. Growth opportunity was measured using Tobin‟s q as the ratio of market value of assets to total assets. Profitability measured as the earnings after tax to total assets and dividend payout ratio as the ordinary dividends paid to total assets.
The growth opportunity variable was lagged in order to capture the investment reaction of the firms in the immediate year that followed. This time lag gives firm time to react to any positive growth opportunities that emerge. The study established that there was an insignificant positive relationship between incentive to invest to and capital expenditure. It was apparent that as a company‟s growth opportunity emerged, corresponding capital expenditure to exploit the opportunity was insignificant.
The findings of the study indicate that there was a positive relationship between profitability and corporate investments of non financial companies listed on the NSE, Kenya. Dividend payment was also found to have an insignificant negative relationship with corporate investment of non financial companies listed on the NSE, Kenya.
The fourth objective was to determine the moderating effects of ownership concentration on the relationship between financial flexibility and corporate investments of non financial companies listed on NSE, Kenya. The product coefficient
has no effects on the stated relationship. These results corroborate the findings by Marchica and Mura (2010) where they found that no cluster of firms whether financially or not financially flexible were affected by ownership concentration in investment decisions. However, while the ownership concentration is around 10 percent in Marchica and Mura (2010) findings, this study established that on insignificant percentage of individuals and institutions own around 72 percent of the companies.