۱- Introduction

۲- Related literature

۳- Data and methods

۴- Results and discussions

۵- Robustness testing and further analysis

۶- Conclusions

References

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.

Introduction

The efficient allocation of internally generated cash flows (cash flows, henceforth) is one of the vital roles of corporate managers, especially when firms are likely to face external financing constraints. Managers can choose to spend corporate cash flows on new investments, pay dividends, reduce or increase existing debt or equity stocks, or buffer cash reserves to hedge against future capital shortfalls (Chang et al., 2014). Since there are benefits and costs associated with each of the cash flow uses, allocations of cash flows have implications on the viability of firms, especially those operating in underdeveloped African capital markets. Most African economies are characterised by limited access of firms to external capital and weak institutional infrastructure (e.g. legal systems, political/corporate governance structures, etc.) (see Misati and Nyamongo, 2011; Gwatidzo and Ojah, 2014). Moreover, economic uncertainty regarding the frequent policy changes and reversals coupled with political instability in most African countries imply greater operational/ business risk, which may translate into weaker future operating profits/cash flow (Collier and Gunning, 1999) and further worsen the financing problems faced by African firms.