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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]

mailto:[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


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


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)


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


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)


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.

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