Do financial constraints really matter? A case of understudied African firms

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Using a system of equations to account for the simultaneity, inter-temporal and interdependent nature of corporate decisions, we document several new insights into how emerging market firms allocate funds across competing uses-of-funds. Emerging market firms save most of the operating cash flow. When the firms spend, they allocate the remainder to dividend payments first, followed by debt retirements, then equity repurchases and lastly investments. This pecking order of prioritizing savings and dividends ahead of other uses-of-funds highlight difficulties in accessing external finance and a stubbornly resilient signalling motive for firms operating under a high degree of information asymmetry and agency costs. We further find significant asymmetry and heterogeneity in the allocation of funds conditional on credit constraints, deviations from target and around the financial crisis. Our findings signal the need for policies that improve access to external finance and information disclosure in emerging markets.
Original languageEnglish
Pages (from-to)1-36
Number of pages36
JournalInternational Journal of Finance and Economics
Early online date24 Jul 2020
Publication statusE-pub ahead of print - 24 Jul 2020


  • asymmetry in corporate decisions
  • cash flow allocations
  • emerging markets
  • financial constraints
  • financial crisis

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