The Effect of Working Capital Management on Dividend Policy: An Empirical Analysis of Listed Firms in Ghana

Abstract

Relying on more recent data spanning 2007-2016, this paper investigates the impact of working capital management (WCM) on dividend policy of listed non-financial firms in Ghana. Specifically, the study assesses the effect of cash conversion cycle (CCC), days inventory outstanding (DIO), profitability, and firm growth on dividend policy. Employing the ordinary least squares (OLS) analytical technique, the findings reported that working capital management (in terms of cash conversion cycle and days inventory outstanding) and dividend policy are positively related, with DIO having a significant effect on dividend policy. The results also established a positive association between the control variables (profitability and firm growth) and dividend policy albeit insignificantly. Based on the findings, the study concludes that working capital management in terms of days inventory outstanding (DIO) is a critical factor influencing firms’ dividend policy decisions. The study extends the inconclusive empirical evidence on the determinants of dividend policy and fills the lacuna in existing literature by focusing on how working capital management practices influence dividend policy of firms in Ghana. The findings are also useful to the board of directors of non-financial firms in deciding an appropriate dividend policy, and to the shareholders in making investment decisions.

Working Capital Management and Financial Performance of Agricultural Firms Listed on Nairobi Securities Exchange, Kenya

“…Kasozi (2017) in their study in South Africa defined performance as return on equity. On the other hand, defined financial performance as return on capital; Yakubu, Alhassan and Fuseini (2017) in their Ghanaian study defined financial performance as Tobin Q, net profit margin and return on capital ;Godswill Ailemen, Osabohien, Chisom and Pascal (2018) in their Nigerian study adopted the definition of earning per3share (EPS), return3on capital, ROE, and ROA as financial performance. In Kenya, some3of the3indicators of financial performance3are return on3invested capital, return on capital, return3on equity, liquidity3ratios, asset management3ratios, profitability3ratios, leverage3ratios and market3value ratios (Aluoch, 2021;Muhindi & Ngaba, 2018).…”

“…In Africa, Kasozi (2017) studied the effects3of working capital7management on profits of listed manufacturers in South7Africa and found mixed effects of working7capital management7on profitability7where some elements showed a positive with others showing inverse effect. However, Yakubu, Alhassan and Fuseini (2017) studied impact3of working capital3management on performance of listed3firms in3Ghana found that working3capital management directly relates to corporate performance. Godswill et al (2018) studied working3capital management3and bank performance3of deposit money3banks in3Nigeria.…”

The Influence of Financial Behaviour on Financial Risk Tolerance In Investment Decision: A Conceptual Paper

“…From this information, investors will have some calculations on how much return they can expect from their investment, and decide whether to invest or otherwise. Furthermore, according to Yakubu (2021) and Hussain et al (2020), dividend policy is significant in investment decisions and has a crucial role in determining a company's survival in business competition as one of the ways to attract investors to have a shareholding in the company. Therefore, a company should improve its financial performance to overcome the competition.…”

Factors Influencing Financial Risk Tolerance: A Review

“…Companies led by female CFOs also were found to be smaller in size with lower net revenue and net income. Meanwhile, Yakubu (2021) argued that the risk of a firm also can be explained by its dividend payout ratio.…”