Introduction - School of Accounting, Economics and …€¦ · Web viewpolicy, existing literature...
Transcript of Introduction - School of Accounting, Economics and …€¦ · Web viewpolicy, existing literature...
University of KwaZulu-NatalCollege of Law and Management Studies
School of Accounting, Economics & Finance
Does Simultaneity between Cash Holding and Dividend Policies hold in
Zimbabwe’s Multiple Currency System?
Shepard Munyariand
Farai Kwenda
SAEF Working Paper No. 2016/01/02
May 2016
Does simultaneity between cash holding and dividend policies hold in Zimbabwe’s
multiple currency system?
Shepard Munyari*
Farai Kwenda (PhD)**
Abstract
This paper examined cash holding and dividend policies employed by listed companies
operating in Zimbabwe’s multiple currency system. Determinants of corporate dividend and
cash holdings determinants were investigated. Using panel data regression methods on the
panel data obtained from financial statements of 58 non-financial firms registered at the
Zimbabwe Stock Exchange (ZSE) from 2009 to 2014 to determine if simultaneity exists
between dividend policy and corporate cash holdings policy. The study found that dividend
payment policy and cash holdings policy influence each other. In addition, dividend and cash
holdings are both influenced by common variables namely leverage, working capital ratio
and business risk which confirms the existence of simultaneous relationship between
dividend and corporate cash holdings policies. In line with these findings, the study
concluded that it is of paramount importance for financial managers formulate corporate
dividend policy and corporate cash holdings simultaneously while at the same time paying
special attention to the debt ratio, working capital resources and prevailing business risk.
Key Words: dividend policy, cash holding policy, transitional economy
*Corresponding author and Master of Commerce in Finance Candidate, School of Accounting, Economics and Finance, University of KwaZulu-Natal, Email Address: [email protected]**Lecturer, School of Accounting, Economics and Finance, University of KwaZulu-Natal, Email Address: [email protected]
1 IntroductionFinancial management is regarded as an important category of business management. The
key financial management decisions are; capital budgeting, capital structure, working capital
management and the distribution decision. The distribution decision involves decisions about
paying out earnings as a dividends versus retaining them in the business to support future
growth. Companies should devise strategies and policies of rewarding its equity investors in
monetary terms or otherwise to meet their return on investment expectations (Uwuigbe,
Jafaru, & Ajayi, 2012). Inselbag (2007) explained that dividend payment by companies is
necessary to increase the company share price and therefore, the company value. Cash
holding is part of the working capital management decisions that managers make in order to
make sure that the company has enough resources to keep its operations running without
costly disruptions. It is about making sure that the company the right amount of cash at all
times. Holding excessive cash levels causes the firms to get loss because of low returns on
cash and marketable securities. Low levels of cash may cause difficulties in meeting
obligations as and when they fall due.
Despite the compelling reasons to pay dividends companies often find it difficult to declare
and pay dividends to its shareholders. Dividend payments are normally difficult for
companies operating in a challenging economic environment like Zimbabwe. From 1999 to
2008 Zimbabwe experienced severe socio-economic and political crises which almost
brought the whole country to its knees. The inflation rate rose from 15.8 percent in January
1997 (Ministry of Finance, 2006) to 231 150 888.87 percent in July 2008 (Central Statistical
Office, 2008). The unemployment rate was above 80 percent and industry utilization rates of
below 10 percent (Zinyama & Takavarasha, 2014). Zimbabwe reported a whopping 47.26
percent cumulative decline between 1999 and 2007 (International Monetary Fund, 2008) in
its Real Gross Domestic Product (RGDP). In February 2009, Zimbabwe ditched its worthless
Zimbabwean dollar (ZWD) and adopted the multiple-currency system. Change in national
economic policies and formation of a government of national unity in 2009 changed the
economic fortunes of the country. Thus, the country has been in an economic transitional
period since 2009.
Table 1 shows that the country managed to tame the inflation dragon† and register positive
economic growth. Capacity utilization in the manufacturing sector increased in the first three
years of the multi-currency regime. From 2012 to 2014 the economy stagnated though
inflation has remained under control. Capacity utilisation has declined from 57% in 2011 to
36% in 2014. The slowdown of the economy has been attributed to several structural
challenges prevalent in the economy.
Table 1: Real GDP growth and Capacity Utilisation of Zimbabwe’s Manufacturing
Firms
Year 2008 2009 2010 2011 2012 2013 2014
RGDP growth rate 5.4% 9.6% 10% 4.4% 4.5% 3.1%
Capacity Utilisation 10% 32.3% 43.7% 57.2% 44.9% 39.6% 36.3%
Annual inflation rate - 3.1% 3.5% 3.7% 1.6% -0.2%
Source: Ministry of Finance (2010); (Ministry of Finance, 2011, 2012, 2013, 2014, 2015) and
Confederation of Zimbabwe Industries (2010); (Confederation of Zimbabwe Industries, 2011,
2012, 2013, 2014)
Despite some economic positives since the adoption of the multiple currency system in 2009,
the economic environment is still challenging for businesses. The challenges in the operating
environment include liquidity challenges, raw materials shortage, high costs of doing
business, power and water shortages, competition from imports, aging machinery, low
demand of produced products on the local market and funding constraints ((Mahembe &
Odhiambo, 2014). Given these challenges it is important to study the dividend and cash
holding policies being employed by Zimbabwean companies, the determinants of such
dividend and cash holding policies and if simultaneity between dividend and cash holdings
policies. The rest of the paper is organized as follows: Section 2 briefly reviews the literature
on dividend and cash holdings policies and the development of hypothesis. Data sources and
the sample are described in Section 3. Section 4 presents and analyses the principal findings
of the study. The conclusion of the study is presented Section 5.
†The inflation rate was 231 150 888.87 percent in July 2008 (Central Statistical Office, 2008); Hanke and Kwok (2009) estimated the rate of inflation for October 2008 at 89.7 sextillion percent. Though this figure appears exaggerated, it serves to point to the seriousness of the problem that the country was experiencing
2 Literature ReviewThis section reviews existing literature on corporate dividend and cash holdings policies, in
order to a lay a foundation for suitable dividend policies for companies operating in
Zimbabwe’s multiple currency economy. The determinants of corporate dividend and cash
holdings policies for Zimbabwe’s multiple currency economy were considered in the context
of the simultaneity that exists between corporate dividend policy and corporate cash holdings
policy, existing literature on cash holdings policy and the simultaneous relationship between
corporate dividend policy and corporate cash holdings policy were considered in this section.
Dividend payment is a distribution or appropriation of profit to shareholders (Badu, 2013).
On the other hand, dividend policy refers to “the practice that management follows in making
dividend payout decisions or, in other words, the size and pattern of cash distributions over
time to shareholders” (Lease, John, Kalay, Loewenstein, & Sarig, 1999). There are two broad
types of dividend policies, namely cash dividend policies and non-cash dividend policies
(Firer, Ross, Westerfield, & Jordan, 2012). The cash dividend policies include the residual
dividend approach, stable dividend approach and compromise dividend approach while non
cash dividend policies comprise of share repurchase, script issue and share split (Firer et al.,
2012).
Cash holdings refer to the cash on hand or cash available for investment in physical assets
and to distribute to investors (Gill & Shah, 2012). According to Damodaran (2005), firms
have to decide on how much cash they should hold because cash holdings are important to
firms. Firms hold cash in order to reduce transaction costs associated with selling securities to
raise cash, to sustain profitable investments, to venture into new opportunities, to replenish
depleted stock, for survival during crisis period and also for precautionary reasons (Al-Amri,
Al-Busaidi, & Akguc, 2015; Baskin, 1987; Damodaran, 2005; Opler, Pinkowitz, Stulz, &
Williamson, 2001; Sánchez & Yurdagul, 2013). Firms should therefore maintain adequate
cash holdings to meet the above. According to Damodaran (2005) the adequacy of cash
holdings is determined in terms of three measurements, which are cash as a percentage of
market value of firm, cash as a percentage of book value of all assets and cash as a
percentage of firm’s revenues. Thus, cash holdings policy relates to the cash target ratio given
by any of the three measurements.
The choices of corporate dividend policy and corporate cash holdings policy are determined
by various factors. Existing literature points to the fact that the two corporate policies are
influenced by common factors that are explained below.
Determinants of cash holdings and dividend policies: hypotheses development
Firm Size: Firm size is defined as the natural logarithm of sales or assets (Kowalewski,
Stetsyuk, & Talavera, 2007; Ullah, Fida, & Khan, 2012). A positive relationship exists
between dividend policy and firm size (Mehta, 2012; Uwuigbe et al., 2012). Small firms are
likely to have lower dividend payout ratios than large firms. Firm size has a positive
relationship with cash holdings policy (Islam, 2012; Kariuki, Namusonge, & Orwa, 2015;
Koshio, 2005). Larger firms are likely to maintain higher cash ratios than smaller firms.
Consistent with existing studies, it is hypothesized that the size of firms operating in
Zimbabwe’s multiple currency economy has positive influence on the corporate dividend
policies and corporate cash holdings of these firms.
Firm Growth Rate: Firm growth rate is measured as annual sales growth rate. A number of
previous studies found that corporate dividend policy is positively influenced by the growth
rate (Ben Naceur, Goaied, & Belanes, 2006; Fama & French, 2001; Kania & Bacon, 2005).
This means firms experiencing rapid growth in their sales are most likely to have higher
dividend payout ratios than firms experiencing lower growth rates. However,
Demirgünescedil (2015) found a negative relationship between firm growth rate and the
firm’s decision to pay dividends. Based on this finding, the higher the growth rate, the less
likely a firm is to pay dividends, as funds are needed to drive the high growth rate. The
impact of growth rate on corporate cash holdings is reported to be positive (Martínez-
Carrascal, 2010; Opler et al., 2001) as well as being negative (Kariuki et al., 2015). Thus,
firms with higher growth rates can either maintain large or small amount of cash holdings
according to these findings. Considering that Zimbabwean firms need to recapitalize their
operations (Kwenda, 2015) and are operating in a liquidity constrained environment (Kwenda
& Matanda, 2015), it is hypothesised that the growth rate of these firms may have no
influence on their dividend and cash holdings policies.
Profitability: Profitability can be measured in terms of return on equity (ROE), return on
assets (ROA) and operating profit margin (OPM) (Ali & Yousaf, 2013; Hemmati, Rezaei, &
Anaraki, 2013; Mehta, 2012). Profitable firms are likely to pay out more dividends than less
profitable firms. A negative relationship exists between dividend policy and ROA (Mehta,
2012; Thu, Lê Vĩnh Triển, & Anh, 2013) while the relationship is positive between ROE and
dividend policy (Uwuigbe et al., 2012). This means firms with higher ROA maintain lower
dividend payout ratios while firms with higher ROE maintain higher dividend payout ratios.
ROE and EBIT respectively positively and negatively influence cash holdings (Ali & Yousaf,
2013; Hemmati et al., 2013). Thus firms with higher ROE maintain higher cash ratios while
firms with higher EBIT maintain lower cash ratios. In this study, it is been hypothesized that
profitability positively influences both dividend and cash holdings policies.
Financial Leverage: Financial leverage is the extent to which a firm is financed by debt and
is measured by dividing total debt with total assets (Thu et al., 2013). Higher leverage may
result in a lower payout ratio as lenders put restrictive covenants in debt contracts. Al-
Malkawi, Rafferty, and Pillai (2010) and Gupta and Banga (2010) found a negative
relationship between dividend policy and financial leverage, meaning the higher the financial
leverage ratio the lower the dividend payout ratio. However, Jensen (1986) found that firms
with higher financial leverage ratios maintain high dividend payout ratios than firms with
lower financial leverage ratios. In analysing the relationship between financial leverage and
cash holdings, Al-Malkawi et al. (2010) and Anjum and Malik (2013) found that firms with
lower financial leverage ratios keep large cash holdings than firms with higher leverage ratio.
Islam (2012) and Kariuki et al. (2015) analysed the financial leverage and cash holdings
relationship and found that firms with higher leverage ratios maintain lower cash ratios. The
direction of influence on financial leverage on dividend and cash holding policies is difficult
to hypothesize given the conflicting findings in existing studies.
Liquidity: Liquidity or working capital can be defined as total current assets excluding cash
and cash equivalents divided by total current liabilities (Ogundipe, Ogundipe, & Ajao, 2012).
Badu (2013) and Gupta and Banga (2010) reported that firms with higher liquidity ratios pay
higher dividends than firms with lower liquidity ratios. A negative relationship is also
confirmed between liquidity ratio and cash ratio, where firms with higher liquidity ratios are
likely to have lower cash holdings than firms with lower liquidity ratios (Ali & Yousaf, 2013;
Islam, 2012). However, Ogundipe et al. (2012) found that low liquidity companies maintain
lower cash ratios than high liquidity companies. Accordingly, this study hypothesizes that
liquidity significantly influences both corporate dividend policy and corporate cash holdings
policy in a transitional economy.
Business Risk: Business risk can be defined as variability in cash flows or profitability
(Mehta, 2012; Sher, 2014). Firms experiencing high business risks pay lower dividends while
maintaining high levels of cash holdings (Opler et al., 2001; Sher, 2014). In this paper, it is
hypothesised that business risk negatively influences cash holdings policy and positively
influences dividend policy.
The above discussion confirmed that corporate dividend policy and corporate cash holdings
are influenced by common factors. Furthermore, some studies established that dividend
policy and cash holdings policy impact on each other (Gao, Harford, & Li, 2013; Tsuji,
2014). This confirms that there is a simultaneous relationship between dividend policy and
cash holdings policy. A study by Al‐Najjar and Belghitar (2011) confirmed this simultaneous
relationship and is the anchor of this study. The next section will discuss the data sources and
analysis methods.
2.1 Sample and data sourcesThis study aims to examine the dividend and cash holding policies employed by Zimbabwean
listed companies and examine whether simultaneity between these two policies holds. The
empirical study is based on a sample of non-financial firms listed on the Zimbabwe Stock
Exchange. Sample firms’ data were collected from the financial statements for the accounting
period 2009 to 2014 from the McGregor BFA Library. Consistent with some previous studies
firms in the banking and financial services real estate sectors were excluded from the sample
because they are highly leveraged and the nature of their cash holdings is different from the
context of this study.
2.2 Descriptive StatisticsThe means values are used to measure central tendency for the variables while minimum
value, maximum value and standard deviation measure variability in study variables. The
average total annual dividends to profit after tax (DY) is 0.07 with a volatility of 0.17. The
average cash and cash equivalents to total assets (CASH) is 0.06 with a minimum of zero and
a maximum value of 0.29. The average leverage (as measured by total debt to total assets) is
0.53 which means firms in this sample finance a little over half of their assets with debt. The
average ROE is 6% which means that sample firms are generating 6 cents per every dollar
invested by the shareholders. Sample firms are experiencing high growth in sales as shown
by the average of 46%. The average non-cash liquid current assets to total assets (WCR) is
1.46 with a volatility of 0.89, a minimum value of 0.18 and a maximum value of 3.68.
3 MethodologyThe study follows the footsteps of Al‐Najjar and Belghitar (2011) in analyzing the
determinants of cash holdings and dividends payments. The decision to pay dividends
depends on cash held by the company and similarly, the decision to hold cash depends on the
firm’s dividend policy.
Table 2: Descriptive Statistics Variables
Variable construction Mean
Standard Deviation
Minimum
Maximum
DY Total Annual Dividends / Profit
After Tax
0.07 0.17 0 0.8
CASH Cash And Cash Equivalents /
Total Assets
0.06 0.07 0 0.29
SIZE natural logarithm of total assets 4.59 0.80 3.01 6.94
LEV Total debt / total assets 0.53 0.22 0.08 0.99
GR Annual growth rate in sales 0.46 0.66 -0.73 3.64
ROE Profit after tax / Total equity 0.06 0.18 -0.17 1.01
WCR Total Current Assets – Cash &
Cash Equivalents / Total
Current Liabilities
1.46 0.89 0.18 3.68
RISK Variability in Return on Equity 0.37 0.61 0.001 3.62
Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
3.1 Correlation MatrixIn this segment, the findings on the associations among the study variables at 5% significance
level are given. The following Table 6.2 summarises the correlation results of the variables.
Table 3: Correlation MatrixDY CASH SIZE LEV GR ROE WCR RISK
DY 1.0000
CASH 0.8699 1.0000
SIZE 0.7860 0.8500 1.0000
LEV 0.7084 0.8190 0.7437 1.0000
GR -0.1991 -0.1994 -0.2541 -0.1973 1.0000
ROE 0.7888 0.7885 0.7488 0.6580 -0.2046 1.0000
WCR 0.7773 0.8361 0.7978 0.7607 -0.2142 0.7403 1.0000
RISK -0.6896 -0.7107 -0.6146 -0.6943 0.0474 -0.4773 -0.6899 1.000
Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
Table 3 presents the correlation values between dividend payout ratio (DY), cash ratio
(CASH) and the explanatory variables. There is a strong positive correlation between
dividend payout ratio and cash ratio suggesting that when firms increase their dividend
payout ratios when their cash ratios increase. Pairwise correlation among independent
variables; firm size (SIZE), financial leverage (LEV), firm growth (GR), return on equity
(ROE), working capital ratio (WCR) and business risk (RISK) do not exhibit excessively
high correlation; therefore the regression results will not have multi-collinearity problems.
3.2 Single Equation ModelsThe study first performed regression to determine explanatory variables for both dividend
policy and cash holdings policy, devoid of existence of simultaneity. The following models
represent the single equation models:
DY ¿=α0+β1CASH ¿+β ' X ¿+ε ¿ …………………………….……Equation 1CASH¿=α0+β1 DY ¿+β2WCR ¿+β ' X ¿+ε¿ ………………..Equation 2Where DY is dividend payout ratio, CASH is the cash ratio, WCR is working capital ratio, X ¿
is a column vector of specific independent variables for firm ‘i’ in time period ‘t’, α is
intercept for the models, β is slope for research the research variables and error term ε ¿for
firm ‘i’ in time period ‘t’.
3.3 Reduced Equation ModelsDY ¿=π0+π1 LEV ¿+π 2 ROE¿+π 3GR¿+π4 ¿¿¿+π5 RISK ¿+ε¿¿ ……. Equation 3CASH¿=π0+π11 LEV ¿+π12 ROE¿+π 13GR¿+π14 ¿¿¿+π 15 RISK¿+ε¿¿…….….. Equation 4
3.4 Simultaneous Equation ModelsThe following models represent the simultaneous equations for the study:
DY ¿=β0+β1CASH ¿+β2 LEV ¿+β3 ROE¿+β4 GR¿+β5¿¿¿+ β6 RISK ¿+ε¿¿…………......... Equation 5CASH ¿=β7+β8 DY ¿+β9 LEV ¿+ β10 ROE¿+β11GR¿+β12¿¿¿+β13 RISK ¿+ β14 WCR¿+ε¿¿
…………... Equation 6Instrument variable estimation was employed to determine the simultaneity between dividend
policy and cash holdings policy.
The above equation defines the determinants of corporate dividend policy after taking into
consideration the simultaneity between dividend policy and cash holdings policy. The
reduced equation model is based on the existence of a simultaneous relationship that exists
between corporate dividend policy and corporate cash holdings.
4 Results
4.1 Single Equations ResultsThe determinants of dividend payments from regression of 95 percent confidence level are
summarised in Table 4. Model 1 presents regression results where unobserved effects are
assumed to be constant, Model 2 controls for unobserved effects, Model 3 includes time
effects and Model 4 include both time and industry effects. In Model 1 where unobserved
effects are assumed to be constant, dividend policy is influenced by cash holdings, firm size,
financial leverage, return on equity, working capital and business risk. In Model 2 where
unobserved effects are controlled; cash holdings, firm size, financial leverage, working
capital ratio and business risk significantly influence dividend policy.
Table 4: Dividend Policy Determinants
Variable Model Model Model Model1 2 3 4
CASH 0.332** 0.180** 0.214*** 0.141**(0.014) (0.033) (0.004) (0.023)
SIZE 0.02** 0.017*** 0.021 0.060(0.026) (0.004) (0.129) (0.449)
LEV 0.08*** 0.087*** 0.034** 0.112**(0.007) (0.003) (0.031) (0.044)
GR -0.004 -0.008 -0.008 -0.018
(0.505) (0.457) (0.646) (0.618)ROE 0.136** 0.315 0.194 0.162
(0.032) (0.106) (0.351) (0.289)WCR 0.034*** 0.003 0.012** 0.052***
(0.000) (0.001) (0.014) (0.002)RISK -0.038** -0.100** 0.021*** -0.029***
(0.012) (0.024) (0.028) (0.022)CONSTANT -0.135*** -0.130*** -0.012** -0.013
(0.001) (0.002) (0.043) (0.124)R2 0.81 0.81 0.78 0.74
t statistics in parenthesis *, ** and *** significant at 10%, 5% and 1% respectively Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
In Model 4 where time and industry effects are taken into consideration, cash holdings,
financial leverage, working capital and business risk significantly influence the dividend
policy. Consistent with Mehta (2012), this study also found that business risk has a negative
relationship with dividend payout ratio while the rest of the significant variables have a
positive relationship with dividend payout ratio. The negative relationship between business
risk and dividend policy suggests that when the firms are experiencing high business risk,
they maintain lower dividend payout ratio. Firms keep a higher dividend payout ratio if their
cash ratio, firm size, financial leverage ratio and working capital ratio are high consistent
with previous studies (Koshio, 2005; Uwuigbe et al., 2012).
Table 5: Cash Holdings Policy Determinants
Variable Model Model Model Model1 2 3 4
DY 0.157*** 0.145*** 0.114*** 0.194**(0.000) (0.000) (0.002) (0.014)
SIZE 0.006 0.013 0.047 0.013(0.428) (0.221) (0.121) (0.192)
LEV 0.097*** 0.0920*** 0.160** 0.091***(0.000) (0.000) (0.036) (0.001)
GR 0.001 0.014 0.023* 0.025**(0.746) (0.980) (0.051) (0.048)
ROE -0.006 -0.011 -0.024 -0.009(0.843) (0.733) (0.635) (0.827)
WCR 0.030*** 0.018*** 0.014*** 0.008**(0.000) (0.010) (0.006) (0.035)
RISK 0.017** 0.012** 0.037** 0.013**(0.030) (0.042) (0.019) (0.020)
CONSTANT -0.08*** -0.074*** -0.116 -0.034**(0.010) (0.09) (0.113) (0.019)
R2 0.78 0.79 0.87 0.87t statistics in parenthesis *, ** and *** significant at 10%, 5% and 1% respectively Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
The regression results for determinants of cash holdings at 5% significance level are given in
Table 5. When assuming that unobserved effects are constant or when unobserved effects are
controlled cash holdings policy in a Zimbabwe’s multiple currency is influenced by dividend
payments, financial leverage, working capital and business risk. However, when taking
industry and time effects into consideration cash holdings policy is influenced by dividend
payments, financial leverage, firm’s growth rate, working capital and business risk. Firms
keep higher levels of cash holdings in the face of higher dividend payments, financial
leverage, working capital and business risk. The results corroborate what is reported in
existing empirical evidence. Firms have to increase their cash holdings in the face of
increasing dividend payments, financial leverage, working capital, sales and business risk but
reduce the cash holdings if these explanatory variables are also decreasing (Ku, Lee, Chen, &
Chang, 2013; Ogundipe et al., 2012; Sher, 2014).
4.2 Reduced Form ResultsThe above single equation results are biased and inconsistent as a result of presence of
endogeneity bias. The reduced form equation results in this segment are given to counter the
endogeneity bias. The reduced form equation results for dividend payments are presented
first in Table 6. The reduced form results for determinants of dividend payments are
consistent with single equation results. Firm size, financial leverage, return on equity,
working capital ratio and business have been reconfirmed as determinants corporate dividend
policy in Zimbabwe’s multiple currency economy. Thus, the absence of endogeneity bias has
not changed the results under the reduced form. The reduced form equation results for cash
holdings determinants are summarised in Table 7.
Table 6: Dividend Policy Reduced Form Results
Variable Model Model Model Model1 2 3 4
SIZE 0.234** 0.089** 0.114* 0.063(0.013) (0.036) (0.089) (0.332)
LEV 0.112** 0.129** 0.096*** 0.238***(0.024) (0.019) (0.008) (0.006)
GR -0.012 -0.017 -0.164 -0.092(0.168) (0.879) (0.657) (0.513)
ROE 0.231** 0.298 0.078 0.281(0.014) (0.123) (0.135) (0.182)
WCR 0.068** 0.102** 0.068*** 0.087***(0.012) (0.031) (0.008) (0.005)
RISK -0.123*** -0.214*** 0.097** -0.055***(0.009) (0.006) (0.015) (0.004)
CONSTANT -0.219** -0.290*** -0.152** -0.071(0.023) (0.006) (0.041) (0.234)
R2 0.72 0.73 0.68 0.66t statistics in parenthesis *, ** and *** significant at 10%, 5% and 1% respectively Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
The results in Table 7 above confirm that cash holdings under reduced form equation are
influenced by financial leverage, working capital ratio and business risk. The same three
factors have also been confirmed as determinants of cash holdings under the single equation
results. However, growth rate which has been confirmed as an explanatory variable under
single equation results, is an insignificant factor under reduced form equation. Thus,
elimination of endogeneity bias leads to exclusion of firm growth rate as a determinant of
cash holdings in Zimbabwe’s multiple currency economy.
Table 7: Cash Holdings Policy Reduced Form Results
Variable Model Model Model Model1 2 3 4
SIZE 0.019 0.098 0.104 0.069(0.342) (0.216) (0.214) (0.248)
LEV 0.143*** 0.105*** 0.098** 0.127**(0.002) (0.004) (0.025) (0.011)
GR 0.021 0.027 0.062 0.032*(0.542) (0.618) (0.121) (0.078)
ROE -0.124 -0.042 -0.052 -0.025(0.612) (0.561) (0.674) (0.921)
WCR 0.048*** 0.018** 0.024** 0.053**(0.001) (0.017) (0.016) (0.014)
RISK 0.126*** 0.095** 0.062*** 0.013**(0.004) (0.013) (0.010) (0.012)
CONSTANT -0.123 -0.105 -0.602 -0.114*(0.261) (0.116) (0.219) (0.096)
R2 0.64 0.68 0.72 0.76t statistics in parenthesis *, ** and *** significant at 10%, 5% and 1% respectively Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
Simultaneous equation results obtained from instrument variable estimation presented in
Table 8 confirm that dividend payout ratio and cash ratio influence each other significantly.
This reciprocal significant relationship between cash ratio and dividend payout ratio is
collaborated by previous studies (Opler et al., 1999; Gao et al., 2013; Tsuji, 2014). The
regression results also show that there are common explanatory variables between dividend
payout ratio and cash ratio. The common significant explanatory variables for both dividend
payout ratio and cash ratio are financial leverage (LEV), working capital ratio (WCR) and
business risk (RISK). It can be concluded that there is a simultaneous relationship between
corporate dividend policy and corporate cash holdings policy for listed non-financial firms
operating in Zimbabwe’s multiple currency system. This study confirms the findings of Al-
Najjar and Belghitar (2011) who first noted the existence of simultaneous relationship
between corporate dividend policy and corporate cash holdings.
4.3 Simultaneous Equations ResultsFindings from instrument variable estimation for simultaneous equations models are
summarised in Table 7.
Table 8: Simultaneity Test ResultsVariable Dependent variable
– dividend Dependent variable
– cash CASH 0.312** -
(0.012) -DY - 0.081**
- (0.006) SIZE -0.057** 0.018
(0.046) (0.163)LEV 0.042** 0.098***
(0.032) (0.000) GR 0.051 0.01
(0.640) (0.935)ROE 0.640 0.036
(0.015) (0.589)WCR 0.026** 0.020***
(0.024) (0.006) RISK -0.012** 0.011***
(0.017) (0.008) CONSTANT -0.288* -0.114**
(0.069) (0.038)R2 0.75 0.86
t statistics in parenthesis *, ** and *** significant at 10%, 5% and 1% respectively Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data obtained from the McGregor BFA library.
5 ConclusionThe aim of the study was to test whether simultaneity between cash holding and dividend
policies hold in Zimbabwe’s multiple currency system. Zimbabwe is on a recovery from
decade political social and economic crises. Using a sample of 58 ZSE-listed non-financial
firms for the period 2009-2014 the study found that dividend policy and cash holdings
influence each other and are also influenced by common factors, financial leverage, working
capital ratio and business risk. The study concluded that simultaneity holds between cash
holdings and dividend policy. It is therefore importance for finance managers to pay attention
to the drivers of these two important decisions since they significantly influence each other.
ReferencesAl-Amri, K., Al-Busaidi, M., & Akguc, S. (2015). Conservatism and corporate cash holdings: a risk
prospective. Investment Management and Financial Innovations, 12(1), 101-113. Al-Malkawi, H.-A. N., Rafferty, M., & Pillai, R. (2010). Dividend policy: A review of theories and
empirical evidence. International Bulletin of Business Administration, 9(9), 171-200. Al Najjar, B., & Belghitar, Y. (2011). Corporate cash holdings and dividend payments: Evidence from‐
simultaneous analysis. Managerial and Decision Economics, 32(4), 231-241. Ali, A., & Yousaf, S. (2013). Determinants of Cash holding in German Market. IOSR Journal of
Business and Management (IOSR-JBM), 12(6), 28-34. Anjum, S., & Malik, Q. (2013). Determinants of corporate liquidity: An analysis of cash holdings.
Journal of Business and Management, 7(2), 94-100. Badu, E. A. (2013). Determinants of Dividend Payout Policy of listed Financial Institutions in Ghana.
Research Journal of Finance and Accounting, 4(7), 184-190. Baskin, J. (1987). Corporate liquidity in games of monopoly power. The Review of Economics and
Statistics, 312-319. Ben Naceur, S., Goaied, M., & Belanes, A. (2006). On the determinants and dynamics of dividend
policy. International review of Finance, 6(1 2), 1-23. ‐Central Statistical Office, C. (2008). Monthly updates. Harare: Central Statistical Office.Confederation of Zimbabwe Industries, C. Z. I. (2010). Manufacturing Sector Survey. Retrieved from
Harare Confederation of Zimbabwe Industries, C. Z. I. (2011). Manufacturing Sector Survey. Retrieved from
Harare Confederation of Zimbabwe Industries, C. Z. I. (2012). Manufacturing Sector Survey. Retrieved from
Harare Confederation of Zimbabwe Industries, C. Z. I. (2013). Manufacturing Sector Survey. Retrieved from
Harare Confederation of Zimbabwe Industries, C. Z. I. (2014). Manufacturing Sector Survey. Retrieved from
Harare Damodaran, A. (2005). Dealing with cash, cross holdings and other non-operating assets:
Approaches and implications. Cross Holdings and Other Non-Operating Assets: Approaches and Implications (September 30, 2005).
Demirgünescedil, K. (2015). Determinants of Target Dividend Payout Ratio: A Panel ARDL Analysis. International Journal of Economics and Financial Issues, 5(2).
Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3-43.
Firer, C., Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2012). Fundamentals of Corporate Finance (5th Ed ed.). Berkshire McGraw-Hill Education
Gao, H., Harford, J., & Li, K. (2013). Determinants of corporate cash policy: Insights from private firms. Journal of Financial Economics, 109(3), 623-639.
Gill, A., & Shah, C. (2012). Determinants of corporate cash holdings: Evidence from Canada. International Journal of Economics and Finance, 4(1), 70.
Gupta, A., & Banga, C. (2010). The determinants of corporate dividend policy. Decision, 37(2), 63. Hanke, S. H., & Kwok, A. K. F. (2009). On the measurement of Zimbabwe's hyperinflation. Cato
Journal, 29(2). Hemmati, H., Rezaei, F., & Anaraki, N. B. (2013). Investigating the Financial Determinants of
Corporate Cash Holdings in Tehran Stock Exchange. Interdisciplinary Journal of Contemporary Research In Business, 5(6), 92.
Inselbag, I. (2007) Why do companies pay dividends: . Vol. 15. Working Paper Series The Wharton School, University of Pennsylvania, Philadephia.
International Monetary Fund, I. (2008). World Economic Outlook Database, October 2008. Washington, D. C: , United States of America.: International Monetary Fund.
Islam, S. (2012). Manufacturing Firms' Cash Holding Determinants: Evidence from Bangladesh. International Journal of Business and Management, 7(6), 172.
Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. American Economic Review, 76(2).
Kania, S. L., & Bacon, F. W. (2005). What factors motivate the corporate dividend decision. ASBBS E-Journal, 1(1), 97-107.
Kariuki, S. N., Namusonge, G. S., & Orwa, G. O. (2015). Determinants of corporate cash holdings: evidence from private manufacturing firms in Kenya. International Journal of Advanced Research in Management and Social Sciences, 4(6), 15-33.
Koshio, S. (2005). Nível de caixa de empresas não financeiras no Brasil: determinantes e relação com o endividamento.
Kowalewski, O., Stetsyuk, I., & Talavera, O. (2007). Do Corporate Governance and Ownership Determine Dividend Policy in Poland? Bank i Kredyt(11-12), 60-86.
Ku, C., Lee, T., Chen, H., & Chang, D. (2013). Excess cash holding and corporate governance: A comparative study of Taiwan and Mainland China firms. International Journal of Humanities and Social Science, 3(21), 53-70.
Kwenda, F. (2015). Corporate Financing Strategies employed by listed firms in Zimbabwe firms under the multiple currency era. Risk governance and control : financial markets and institutions, 5(3), 161-166.
Kwenda, F., & Matanda, E. (2015). Working capital management in a liquidity constrained economy: A case of ZSE-listed firms under the multiple currency era. . Public and Municipal Finance, 4(1).
Lease, R. C., John, K., Kalay, A., Loewenstein, U., & Sarig, O. H. (1999). Dividend Policy:: Its Impact on Firm Value. OUP Catalogue.
Mahembe, E., & Odhiambo, N. M. (2014). A critical review of FDI inflows and economic growth in low-income SADC countries: prospects and challenges. Problems and Perspectives in Management, 12, 7-16.
Martínez-Carrascal, C. (2010). Cash Holdings, Firm Size and Access to External Finance-Evidence for the Euro Area.
Mehta, A. (2012). An Empirical Analysis of Determinants of Dividend Policy-Evidence from the UAE Companies. Global Review of Accounting and Finance, 3(1), 18-31.
Ministry of Finance, M. (2006). Budget Statement Harare: Government Printers.Ministry of Finance, M. (2010). Budget Statement. Harare: Government Printers.Ministry of Finance, M. (2011). Budget Statement. Harare: Government Printers.Ministry of Finance, M. (2012). Budget Statement. Harare: Government Printers.Ministry of Finance, M. (2013). Budget Statement. Harare: Government Printers.Ministry of Finance, M. (2014). Budget Statement. Harare: Government Printers.Ministry of Finance, M. (2015). Budget Statement. Harare: Government Printers.Ogundipe, L. O., Ogundipe, S. E., & Ajao, S. K. (2012). Cash holding and firm characteristics: Evidence
from Nigerian emerging market. Journal of Business Economics and Finance, 1(2), 45-58. Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (2001). Corporate cash holdings. Journal of Applied
Corporate Finance, 42(1), 55-66. Sánchez, J. M., & Yurdagul, E. (2013). Why are corporations holding so much cash? The Regional
Economist, 21(1), 4-8. Sher, G. (2014). Cashing in for Growth: Corporate Cash Holdings as an Opportunity for Investment in
Japan: International Monetary Fund.Thu, N. K., Lê Vĩnh Triển, D. T. T., & Anh, H. T. N. (2013). Determinants of Dividend Payments of Non-
financial Listed Companies in Ho Chi Minh Stock Exchange.
Tsuji, C. (2014). Cash Holdings, Dividend Policy, and Stock Return of the Automobile Related Firms at the Tokyo Stock Exchange: Before and After the US Lehman Shock. Journal of Social Science Studies, 1(2), 32.
Ullah, H., Fida, A., & Khan, S. (2012). The impact of ownership structure on dividend policy evidence from emerging markets KSE-100 Index Pakistan. International Journal of Business and Social Science, 3(9).
Uwuigbe, U., Jafaru, J., & Ajayi, A. (2012). Dividend policy and firm performance: A study of listed firms in Nigeria. Accounting and Management Information Systems, 11(3), 442.
Zinyama, T., & Takavarasha, P. E. (2014). Zimbabwe’s Government of National Unity: Harvest of Thorns? International Journal of Asian Social Science, 4(3), 444-459.