Allocation of internally generated corporate cash flow in Africa

Henry Agyei-Boapeah and Michael Machokoto

Journal of Accounting in Emerging Economies, 2018, vol. 8, issue 4, 495-513

Abstract: Purpose - The purpose of this paper is to examine how managers of African firms, operating in environments characterised by less developed capital markets and weak institutional structures, make use of their internally generated cash flows. Design/methodology/approach - The authors use a panel data methodology which regresses a particular use of cash flow (e.g. capital expenditure) on the internally generated operating cash flow of a firm and a set of control variables. The estimation of the regression model is done by ordinary least squares regressions. For robustness, the authors also estimate the models using system generalised method of moments to control for endogeneity and measurement error problems. Findings - The authors find that managers of African firms hold most of their internally generated cash flows, and when they decide to spend, they allocate a higher proportion towards dividend payments; followed by debt adjustments; then to investments; and lastly, to equity repurchases. Research limitations/implications - The findings are consistent with the existence of a significant financial constraint in African markets, and the use of dividends to signal credit quality in relatively underdeveloped capital markets. Originality/value - The authors provide a more extensive analysis of how a firm spends a unit of the incremental cash flow it generates. In particular, the analysis shows that beyond investments in capital expenditure, other cash flow uses (i.e. cash holdings, dividend payments, and adjustments in debt and equity capital) which have been largely overlooked in the literature are important to understanding the effects of financial constraints on corporate decisions. Also, the early empirical evidence on the cash flow allocations of African firms could be a step in the right direction in informing theory development in this area.

Keywords: Africa; Cash flow; Financial constraint; Dividends; Cash holdings; Capital expenditure (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jaeepp:jaee-10-2017-0099

DOI: 10.1108/JAEE-10-2017-0099

Access Statistics for this article

Journal of Accounting in Emerging Economies is currently edited by Dr Shahzad Uddin

More articles in Journal of Accounting in Emerging Economies from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().