The determinants of corporate financial policy in Zimbabwe: empirical evidence from company panel data

This thesis examines the patterns and determinants of corporate financial policy (capital structure and dividend policy) in Zimbabwe. In particular it investigates various aspects of corporate financial behaviour in an emerging market; the evolution of corporate financial structure and dividend payout ratio over the past 25 years (1975-1999), the impact of the reform programme (introduced in 1992) on firm characteristics, the corporate financing patterns during the period 1990-1999, the determinants of corporate capital structures and dividend policy and the interaction between corporate financing and dividend policy decisions. The main results that emerge from the analysis suggest that (i) the debt ratio for the Zimbabwean corporate sector significantly increased after the reform (ii) the Zimbabwean corporate sector mainly depends on external finance (75 % of total financing) especially short-term finance, which contributes 52 % of total financing. Furthermore, the results support the following hypotheses (i) the pecking order hypothesis that firms prefer internal financing to external financing, (ii) the trade-off hypothesis that non-debt tax shields reduce the expected gains from leverage, (iii) firms use liquid assets to finance investments, (iv) the agency cost hypothesis that increasing managerial ownership helps to align the interests of managers and shareholders and therefore reduces the role of debt as an agency-conflict mitigating factor, (v) large firms have lower bankruptcy costs and therefore can support more debt than smaller firms, (vi) debt service limits the amount of cash paid out as dividends, and (vii) high growth firms rely on external finance more than low growth firms (viii) high growth and firms have low payout ratios (iv) Cash flows and institutional investors increase the likelihood that firms will pay dividends (v) capital structure and dividend policy decisions are interdependent and highly leveraged firms have low payout ratios.