IIARD International Institute of Academic Research and Development

IIARD International Journal of Economics and Business Management (IJEBM )

E-ISSN 2489-0065
P-ISSN 2695-186X
VOL. 11 NO. 3 2025
DOI: 10.56201/ijebm.vol.11.no3.2025.pg14.27

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A Free Cash Flow Theory Perspective on the Nexus Between Cash Management and Return on Equity: Evidence from Nigerian Food and Beverage Firms

Okeke, Nneka Maureen, Gilbert Ogechukwu Nworie

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Abstract

Poor cash management can prevent companies from reinvesting surplus funds into high-return opportunities, which ultimately harms shareholder value and diminishes financial performance. To address this problem, this study examined the extent to which cash management affects return on equity of listed food and beverages firms in Nigeria based on the postulations of free cash flow theory. Ex-post facto research design was deployed in the study while the population comprised seventeen listed food and beverages firms listed on the Nigerian exchange group. Secondary data were extracted from the published financial statements of the thirteen sampled firms over a period of twelve years, spanning 2012 to 2023. Hypotheses were tested using Period Seemingly Unrelated Regression. It was found that increase in cash ratios significantly reduces the return on equity of listed food and beverage firms in Nigeria (b = -0.084507; p-value = 0.000000). In conclusion, while maintaining liquidity is essential for operational stability, an overly conservative approach to cash retention could limit firms’ ability to seize profitable investment opportunities, and thereby impairing their financial performance. This conclusion implies that financial managers should adopt an optimal cash management strategy that balances liquidity and profitability by ensuring that excess cash is efficiently deployed into productive investments rather than being retained unnecessarily.

keywords:

Cash management, Return on equity, Free cash flow theory

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