The Effect of Cash Flow on the Financial Performance of Listed Insurance Firms in Nairobi Securities Exchange, Kenya

Abstract

The financial performance of listed insurance companies holds utmost significance as they undertake enduring investments across diverse market conditions, aiming to optimize returns while ensuring sustainable growth, compensation, and risk management. Despite all these, their financial performance has remained low and unstable, as evidenced by inconsistent revenues, which is a worrying situation that is affecting the financial system and weakening Kenya's economy due to its contribution. Empirical information reveals that cash flow is very critical for any business's survival since its inadequacy leads to eventual business failure or and firm’s inability to grow. The analysis of existing empirical studies on cash flow underscores its role in augmenting corporate financial performance, although it fails to provide a conclusive stance on its impact. This research aims to investigate the influence of cash flow on the financial performance of insurance firms listed on the Nairobi Securities Exchange in Kenya. The study is framed within the context of the pecking order theory. Employing a correlational research design, the investigation focuses on six (6) listed insurance entities at the Nairobi Securities Exchange, utilizing a census technique for data collection via the review of documents as a secondary data source. Through the application of descriptive and inferential statistical methods to the data, the ensuing findings revealed a noteworthy positive impact (β=0.326043, P=0.017). This suggests that a marginal augmentation in cash flow corresponds to a substantial 32.6% upsurge in the financial performance of the insurance firms listed. Consequently, the null hypothesis was invalidated. In conclusion, it is ascertained that cash flow indeed wields influence over the financial performance of listed insurance entities in the Kenyan context. As a recommendation, insurance-listed firms on the NSE are advised to prioritize internal financing for bolstering cash holdings, as opposed to external funding, thereby fostering heightened returns and enhanced financial performance.