University of KwaZulu-Natal
College 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 Munyari
and
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 Introduction
Financial 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
†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
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
RGDP growth rate
Capacity Utilisation
Annual inflation rate
10%
2009
2010
2011
2012
2013
2014
5.4%
9.6%
10%
4.4%
4.5%
3.1%
32.3%
43.7%
57.2%
44.9% 39.6%
36.3%
-
3.1%
3.5%
3.7%
-0.2%
1.6%
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.
2 Literature Review
This 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 sources
This 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 Statistics
The 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 Methodology
The 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
DY
Mean Standard Minimum Maximum
Deviation
Total Annual Dividends / Profit 0.07
0.17
0
0.8
After Tax
CASH
Cash And Cash Equivalents /
0.06
0.07
0
0.29
Total Assets
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 &
1.46
0.89
0.18
3.68
0.37
0.61
0.001
3.62
Cash Equivalents / Total Current
Liabilities
RISK
Variability in Return on Equity
Source: Own calculations using an unbalanced panel over the period 2009 to 2014. Data
obtained from the McGregor BFA library.
3.1 Correlation Matrix
In 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 Matrix
DY
CASH SIZE
LEV
GR
ROE
WCR
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
RISK
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 Models
The 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:
𝐷𝑌𝑖𝑡 = 𝛼0 + 𝛽1 𝐶𝐴𝑆𝐻𝑖𝑡 + 𝛽 ′ 𝑋𝑖𝑡 + 𝜀𝑖𝑡 …………………………….……Equation 1
𝐶𝐴𝑆𝐻𝑖𝑡 = 𝛼0 + 𝛽1 𝐷𝑌𝑖𝑡 + 𝛽2 𝑊𝐶𝑅𝑖𝑡 + 𝛽 ′ 𝑋𝑖𝑡 + 𝜀𝑖𝑡 ………………..Equation 2
Where 𝐷𝑌 is dividend payout ratio, 𝐶𝐴𝑆𝐻 is the cash ratio, 𝑊𝐶𝑅 is working capital ratio, 𝑋𝑖𝑡
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 εit for firm ‘𝑖’ in
time period ‘𝑡’.
3.3 Reduced Equation Models
𝐷𝑌𝑖𝑡 = π0 + π1 𝐿𝐸𝑉𝑖𝑡 + π2 𝑅𝑂𝐸𝑖𝑡 + π 3 𝐺𝑅𝑖𝑡 + π4 𝑆𝐼𝑍𝐸𝑖𝑡 + π5 𝑅𝐼𝑆𝐾𝑖𝑡 + ε𝑖𝑡 ……. Equation 3
𝐶𝐴𝑆𝐻𝑖𝑡 = π0 + π11 𝐿𝐸𝑉𝑖𝑡 + π12 𝑅𝑂𝐸𝑖𝑡 + π 13 𝐺𝑅𝑖𝑡 + π14 𝑆𝐼𝑍𝐸𝑖𝑡 + π15 𝑅𝐼𝑆𝐾𝑖𝑡 + ε𝑖𝑡 …….…..
Equation 4
3.4 Simultaneous Equation Models
The following models represent the simultaneous equations for the study:
𝐷𝑌𝑖𝑡 = β0 + β1 𝐶𝐴𝑆𝐻𝑖𝑡 + β2 𝐿𝐸𝑉𝑖𝑡 +β3 𝑅𝑂𝐸𝑖𝑡 + β4 𝐺𝑅𝑖𝑡 + β5 𝑆𝐼𝑍𝐸𝑖𝑡 + β6 𝑅𝐼𝑆𝐾𝑖𝑡 +
ε𝑖𝑡 …………......... Equation 5
𝐶𝐴𝑆𝐻𝑖𝑡 = β7 + β8 𝐷𝑌𝑖𝑡 + β9 𝐿𝐸𝑉𝑖𝑡 +β10 𝑅𝑂𝐸𝑖𝑡 + β11 𝐺𝑅𝑖𝑡 + β12 𝑆𝐼𝑍𝐸𝑖𝑡 + β13 𝑅𝐼𝑆𝐾𝑖𝑡 +
β14 𝑊𝐶𝑅𝑖𝑡 + ε𝑖𝑡 …………... Equation 6
Instrument 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 Results
The 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
CASH
SIZE
LEV
GR
ROE
WCR
RISK
CONSTANT
R2
Model
1
0.332**
(0.014)
0.02**
(0.026)
0.08***
(0.007)
-0.004
(0.505)
0.136**
(0.032)
0.034***
(0.000)
-0.038**
(0.012)
-0.135***
(0.001)
0.81
Model
2
0.180**
(0.033)
0.017***
(0.004)
0.087***
(0.003)
-0.008
(0.457)
0.315
(0.106)
0.003
(0.001)
-0.100**
(0.024)
-0.130***
(0.002)
0.81
Model
3
0.214***
(0.004)
0.021
(0.129)
0.034**
(0.031)
-0.008
(0.646)
0.194
(0.351)
0.012**
(0.014)
0.021***
(0.028)
-0.012**
(0.043)
0.78
Model
4
0.141**
(0.023)
0.060
(0.449)
0.112**
(0.044)
-0.018
(0.618)
0.162
(0.289)
0.052***
(0.002)
-0.029***
(0.022)
-0.013
(0.124)
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
DY
SIZE
LEV
GR
ROE
WCR
RISK
CONSTANT
R2
Model
1
0.157***
(0.000)
0.006
(0.428)
0.097***
(0.000)
0.001
(0.746)
-0.006
(0.843)
0.030***
(0.000)
0.017**
(0.030)
-0.08***
(0.010)
0.78
Model
2
0.145***
(0.000)
0.013
(0.221)
0.0920***
(0.000)
0.014
(0.980)
-0.011
(0.733)
0.018***
(0.010)
0.012**
(0.042)
-0.074***
(0.09)
0.79
Model
3
0.114***
(0.002)
0.047
(0.121)
0.160**
(0.036)
0.023*
(0.051)
-0.024
(0.635)
0.014***
(0.006)
0.037**
(0.019)
-0.116
(0.113)
0.87
Model
4
0.194**
(0.014)
0.013
(0.192)
0.091***
(0.001)
0.025**
(0.048)
-0.009
(0.827)
0.008**
(0.035)
0.013**
(0.020)
-0.034**
(0.019)
0.87
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.
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 Results
The 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
SIZE
LEV
GR
ROE
WCR
RISK
CONSTANT
R2
Model
1
0.234**
(0.013)
0.112**
(0.024)
-0.012
(0.168)
0.231**
(0.014)
0.068**
(0.012)
-0.123***
(0.009)
-0.219**
(0.023)
0.72
Model
2
0.089**
(0.036)
0.129**
(0.019)
-0.017
(0.879)
0.298
(0.123)
0.102**
(0.031)
-0.214***
(0.006)
-0.290***
(0.006)
0.73
Model
3
0.114*
(0.089)
0.096***
(0.008)
-0.164
(0.657)
0.078
(0.135)
0.068***
(0.008)
0.097**
(0.015)
-0.152**
(0.041)
0.68
Model
4
0.063
(0.332)
0.238***
(0.006)
-0.092
(0.513)
0.281
(0.182)
0.087***
(0.005)
-0.055***
(0.004)
-0.071
(0.234)
0.66
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.
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
SIZE
LEV
GR
ROE
WCR
RISK
CONSTANT
R2
Model
1
0.019
(0.342)
0.143***
(0.002)
0.021
(0.542)
-0.124
(0.612)
0.048***
(0.001)
0.126***
(0.004)
-0.123
(0.261)
0.64
Model
2
0.098
(0.216)
0.105***
(0.004)
0.027
(0.618)
-0.042
(0.561)
0.018**
(0.017)
0.095**
(0.013)
-0.105
(0.116)
0.68
Model
3
0.104
(0.214)
0.098**
(0.025)
0.062
(0.121)
-0.052
(0.674)
0.024**
(0.016)
0.062***
(0.010)
-0.602
(0.219)
0.72
Model
4
0.069
(0.248)
0.127**
(0.011)
0.032*
(0.078)
-0.025
(0.921)
0.053**
(0.014)
0.013**
(0.012)
-0.114*
(0.096)
0.76
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.
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 Results
Findings from instrument variable estimation for simultaneous equations models are
summarised in Table 7.
Table 8: Simultaneity Test Results
Variable
CASH
DY
SIZE
LEV
GR
ROE
WCR
RISK
CONSTANT
R2
Dependent variable
– dividend
0.312**
(0.012)
-0.057**
(0.046)
0.042**
(0.032)
0.051
(0.640)
0.640
(0.015)
0.026**
(0.024)
-0.012**
(0.017)
-0.288*
(0.069)
0.75
Dependent variable
– cash
0.081**
(0.006)
0.018
(0.163)
0.098***
(0.000)
0.01
(0.935)
0.036
(0.589)
0.020***
(0.006)
0.011***
(0.008)
-0.114**
(0.038)
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 Conclusion
The 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.
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