Effect of Management of Cash Flow on the Financial Performance of Mutual Funds in Kenya

Abstract

Mutual funds play a fundamental function in Kenya's economy by offering investors the benefits of portfolio diversification and professional management at an occasional cost. This study focuses on the effect of the management of cash flow on the financial performance of mutual funds in Kenya. Specifically, the study sought to assess the effect of operating cash flow management, investing cash flow management, financing cash flow management, free cash flow management and the size of the firm moderating effect in relation to the management of cash flow and financial performance. The study was guided by Agency theory, Baumol Deterministic Theory, Free cash flow theory, Trade-off theory, Financial life cycle theory, and Miller -Orr stochastic cash flow theory. The study employed causal research or explanatory design with secondary panel data which was extracted from the audited financial statements of 22 mutual funds for the period 2011-2016. Descriptive statistics namely; mean, median, minimum, maximum and standard deviation were generated using Eviews software. Diagnostic tests; Multicollinearity test, autocorrelation test, Heteroscedasticity test, normality test, Hausman test, and Granger causality test were carried out. The data was assessed and evaluated using the OLS regression technique. R-square was used to establish the degree to which the predictor variables explain the deviation independent variable. T-tests were used to test the significance of individual variables. F-test was used to verify the significance of the overall model. The p-value at a 5% level of confidence for each t-test was used to make conclusions on whether to accept or reject the null hypothesis. Data was presented in figure and tables. The study found out that operating cash flow management had a significant positive effect on return on assets and insignificant positive effect on return on equity. Investing cash flow management had an insignificant positive effect on return on assets and return on equity. Financing cash flow management had a significant negative effect on financial performance. Free cash flow management had insignificant positive and negative effects on ROA and ROE respectively. While the size of the firm had an insignificant positive effect on ROA and ROE. On the moderating effect of the size of the firm on the effect of management of cash flow on financial performance, it was found out that R2 decreased by 1.17% for the ROA model and 1.26 % for the ROE model when the size of the firm was introduced. It was therefore concluded that the size of the firm had indeed a significant moderating effect. The study concludes that operating cash flow management, investment cash flow management and firm size of the firm influence the financial performance of mutual funds in Kenya positively. The study concludes that financing cash flow management had a significant negative effect on the financial performance of mutual funds in Kenya. The free cash flow management had insignificant positive and negative effects on return on assets and return on equity. The study recommends that managers must come up with the required income policies. The key limitation of the study was that it considered only four independent variables and financial performance whereas might be other variables and non-financial indicators of performance.