Ownership Structure and Investment Cashflow Sensitivity of Ghanaian Listed Firms

ABSTRACT 

There is overwhelming evidence in empirical literature that in the presence of market imperfections, investments of financially constraint firms become sensitive to the availability of internal finance.  There are also contradictory evidences regarding the pattern of the observed investment cash flow sensitivity. However, most of the empirical work on the responsiveness of firms’ investment to cash flow was done using data from developed markets. This study examines not just the effect of shareholding classes, but also the effect of debt holdings on the sensitivity of firms’ investment to availability of cash flows. For a panel data set of 27 Ghanaian listed firms for the period 2007 – 2013, the study applies the Euler equation approach to the empirical modeling of investment. 

This study finds support for the assertion that listed firms face less severe corporate control problems and lower financing constraints and thus have lower investment cash flow sensitivities. However, after interacting cash flow variable with shareholder classes, the cash flow effects on firms’ investment become significantly positive. This result is interpreted in the context of corporate governance issues. The study also finds that a significant positive sensitivity of investment to internal funds is associated with firms that have high debt holdings. This is interpreted within the context of liquidity constraints. 

This study adds to the empirical literature on the investment cash flow relationship. The study provides evidence on the effect of debt holdings on the investment cash flow sensitivity that has not been documented in the empirical literature. An implication of this study is that firms with high debt holdings are found to face greater challenges in accessing external finance. These firms are likely to experience underinvestment which at a macro level, would translate into lower investments and economic growth for the country.