Abstract

A general rise in the cash holding levels by firms internationally in the recent years has led to an increase in interest in cash holding research as cash is an asset that typically yields low return. Empirical research has produced mixed results and often little research has been carried out on the subject in developing countries. This paper thus looks at the determinants of cash holding of 44 non-financial firms listed in Nairobi securities exchange (NSE) for the period 2002 to 2013 using secondary data in annual reports and financial statements. We test for trade off, pecking order and the free cash flow theories using correlational and non-experimental research design. The results of OLS with year and industry dummies and panel data models shows that there exists significant positive and negative relationship between cash holding and cash flow and leverage respectively and insignificant relationship between cash holding and market-to-book value and firm size. Interest rests were found to be a significant mediator of the relationship between cash holding and MTB, size, leverage and cash flow. Industrial sector of a firm’s main activity influences its cash holding policies. This study adds to the frontier knowledge on the determinants of cash holding by helping managers decide on their firm’s optimal cash holding while also serving to inform investors on whether portfolio managers are adopting the right cash holding practices.

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