We examine whether the cash flow sensitivity of cash is asymmetric using a sample of 745 firms from understudied African countries over the period from 2000–۲۰۱۵٫ We hypothesise and find significant asymmetry in the cash flow sensitivity of cash conditional on cash flow and financial constraints. Firms with positive cash flow save while those with negative cash flow dissave. These differences are more apparent in the presence of financial constraints. Our results affirm the asymmetry in the cash flow sensitivity of cash and highlight the severity of the impact of financial constraints on corporate decisions in emerging markets.

Introduction

The relationship between cash and cash flow, the cash flow sensitivity of cash, is a contentious issue in the literature. Almeida et al. (2004), Grullon et al. (2018), Khurana et al. (2006) and McLean and Zhao (2018) find a positive cash flow sensitivity of cash, which they link to the need to hedge against future shortfalls. On the other hand, Riddick and Whited (2009) report a negative cash flow sensitivity of cash. They attribute the positive relationship in prior studies to mismeasurement error in Tobin’s q that if corrected via general method of moments (GMM) estimators results in negative relation. Using an augmented framework of Riddick and Whited (2009), Bao et al. (2012) affirm the negative cash flow sensitivity of cash. However, Chang et al. (2014) have subsequently shown that estimates of cash flow sensitivities based on higher-order moments of the modified generalised method of moments (GMM) (see Erickson and Whited, 2000, 2002, 2012) are in some cases economically implausible. Similarly, Almeida et al. (2010) show that estimators using high-order moments are inefficient and return unstable coefficients that are not economically meaningful in the real world. Therefore, these mixed findings and conclusions highlight the need for further research. It is interesting to note that all the above studies, except for the cross-country studies of Khurana et al. (2006) and McLean and Zhao (2018), focus on developed economies, which limits the generalisability of the findings to emerging economies with markedly different institutions. Yet, the few extant studies in emerging economies find significant heterogeneity in firm financing arising from differences in the level of access to capital markets. For example, Gwatidzo and Ojah (2014) find that institutional infrastructure and non-traditional factors significantly influence corporate debt in underdeveloped African markets.