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

Using a system of equations to account for the simultaneity, intertemporal 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 prioritising 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.