Cash flow information, discretionary accruals and stock return of firms listed in Nairobi securities exchange, Kenya

Abstract

Investors associate successful companies exhibiting high stock returns in the stock market to sound cash flow information. The only motives that attract an investor to invest in the stock market is to get high stock returns. However, most firms in Kenya displayed declining stock returns over time and has posed great challenge to investors’ decisions in the stock market. Consequently, this phenomenon has made investors to question whether cash flow information outlined in the cash flow statement influence stock returns. The purpose of the study was to establish the effect of cash flow information on stock return and test the moderating effect of discretionary accruals on the relationship between cash flow information and stock return. The specific objectives were to establish the effect of operating cash flow on stock return, to determine the effect of financing cash flow on stock return, to evaluate the effect of investing cash flow on stock return, to establish the effect of discretionary accruals on stock returns and to test the moderating effect of discretionary accruals on the relationship between operating, financing, and investing cash flows on stock return of firms listed in NSE. Market efficiency, Signaling and Agency theories guided this study. Positivism research philosophy was utilized by this study and explanatory research design taking longitudinal approach was adopted to collect secondary data from 29 listed non-financial firms at NSE for 12 years from 2007-2019.The findings indicated that operating cash flow (β=0.339, p = 0.000<0.050), financing cash flow (β=0.447, p =0.000<0.050) and investing cash flow (β=0.098, p=0.011 <0.050) had a positive and significant effect on stock return of firms listed at NSE. Further, discretionary accruals positively moderate the relationship between operating cash flow and stock returns (β=0.170, p=0.022 <0.050) and negatively moderates the relationship between investing and financing cash flows (β=-0.140, p=0.007 <0.050) and (β= -0.140, p=0.000<0.050) and stock return respectively. The study concludes that cash flow information significantly affects stock return and discretionary accruals moderates the relationship between cash flow information and stock return. The study, therefore, recommends that firms should prioritize allocation of more resources towards capital projects to enhance stock return, investor confidence and trust that the firms are well financed. Additionally, the study recommends that managers of firms listed in NSE should avoid speculating and signalling the market about future performance using discretionary accruals because there is evidence that discretionary accruals have detrimental moderating effect on the relationship between cash flow information and stock returns in Kenya.