Financial Flexibility and Profitability of Non-Financial Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

Non-financial firms depicts positive and pivotal social economic contributions to the economy in terms of creation of employment, poverty reduction and growth and development of the country’s gross domestic product. However, the financial flexibility causal effect relationship with their profitability is still having controversial debate amongst scholars resulting to its direct effect on profitability being limited, particularly within African frontier capital markets. This study examined the effect of financial flexibility on the profitability of non-financial firms listed at the Nairobi Securities Exchange (NSE), Kenya, for a time horizon between 2015–2024. The study adopted a longitudinal panel research design and utilized firm-level secondary data from 42 non-financial firms in Kenya. Profitability was gauged using Return on Assets (ROA), while financial flexibility was operationalized as firm cash ratio minus industry cash ratio plus the maximum of industry debt ratio minus firm debt ratio or zero. Panel econometric techniques were employed, with diagnostic tests for normality, multicollinearity, heteroscedasticity, serial correlation and stationarity conducted prior to estimation. The Chow and Hausman tests supported a fixed-effects specification with firm-clustered robust standard errors. The findings indicate that financial flexibility had a direct effect on profitability which was statistically significant. The study concluded that firms maintaining greater financial flexibility are better positioned to respond to financing requirements and investment opportunities, thereby enhancing profitability. The study recommends that managers of non-financial firms listed at the NSE preserve adequate financial flexibility through disciplined liquidity planning, diversified financing sources and maintenance of unused debt capacity. Policymakers and capital-market regulators should promote diversified financing alternatives and improved disclosure of financial risks to strengthen firm resilience and profitability.