Abstract
This study explored the association between cash flow variability and investment behaviour of African listed firms. The research employed a dynamic panel data model estimated with the difference and system Generalised Method of Moments estimation techniques on a panel of 815 listed African non-financial firms. The estimation techniques control for unobserved heterogeneity, endogeneity, autocorrelation, heteroscedasticity and dynamic panel bias. Two different measures of volatility were employed; the exponentially weighted moving average, a forward-looking measure that captures innovations in cash flow volatilities and the coefficient of variation that captures the mechanical effect of the possible relation between cash flow levels and volatility. The results obtained suggested that cash-flow volatility is associated with average lower investment in African firms. These findings show that not only cash flows are an important determinant of investment decisions, but the variability of the cash flows also has a significant bearing on the investment levels of African firms. Cash flow volatility has a significant negative impact on investment even for firms with higher cash flows and unconstrained firms. African firms should not only aim at achieving higher cash flows, but the stability of the cash flows is equally important to sustain solid investment levels.
Highlights
Cash flow is the lifeblood of any firm as is blood to the heart
The coefficients of CFV2i,c,t (EWMA) and CFVi,c,t were found to be negative and statistically significant at one percent significance level. These results provided evidence that there is a negative relationship between cash flow volatility and investment at a ninety per cent confidence level
The analysis employed a unique approach in the form of a dynamic panel model and system Generalised Methods of Moments (GMM) which controls for the problem of endogeneity which has not been used in previous studies
Summary
Cash flow is the lifeblood of any firm as is blood to the heart. Firms in Africa and other developing economies suffer unhealthy cash flow streams and liquidity challenges accentuating financial constraints. The need exists to examine the influence of financing friction on investment by comparing the empirical sensitivity of cash flow to investment across firms with evidence from Africa a developing economy.”. This study contributes in a number of ways to the literature on cash flow volatility and firm investment behaviour. The paper offers new evidence on cash flow volatility and firm investment behaviour in developing economies/markets. Controlling for financial distress, the availability of internal funds and growth opportunities the volatility of cash flow remains a significant determinant of firm investment. The rest of the article is structured as follows: Section two expounds the theoretical aspects of cash flow and firm investment; Section three describes the research design and methodology; Section four presents the results and findings; Section five explains the limitations of the study and areas for further research. Section six concludes this article with a number of concluding remarks
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