Cash Flow Volatility and Firm Investment Behaviour: Evidence from African Listed Firms

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.

İşletme Naki̇t Akişlarinin Yatirim Terci̇hleri̇ Üzeri̇ne Etki̇si̇; Son Mali̇ Kri̇z Çerçevesi̇nde Bi̇r Değerlendi̇rme

“…Studies conducted in 2018 show that the subject is still valid in the literature. In the study conducted by Vengesai and Kwenda (2018), the relationship between cash flow variability and investment behavior of companies traded in the stock exchange in Africa was discussed. Dynamic panel data analysis was carried out in the study conducted on 815 enterprises traded on the African stock exchange.…”