The determinants of financial flexibility and investment efficiency: some evidence from JSE - Listed and Non - Financial firms

Abstract

Making and implementing financing decisions to achieve corporate objectives has been a challenging task for many corporate managers for decades. Achieving and maintaining financial flexibility, investment efficiency and ensuring the availability of funds for investment through payout policies are important financing decisions to maximise shareholder’s value. Financial flexibility is important as it determines the financing, investment and distribution policies of a firm and the firm’s payout policy determine the amount of capital available for investment. On the other hand, investment efficiency is fundamental in making strategic investment decisions as it requires that capital investment should only be allocated to profitable projects. Therefore, it is essential to understand the driving factors of these financial management aspects as there are no studies that have examined the impact of firm specific factors and payout policies on the firm’s financial flexibility and investment efficiency in Africa, including South Africa. To examine these financial management aspects, firstly, the study derived and tested estimation models of financial flexibility and investment efficiency in the context of the South African non-financial firms listed on the JSE Limited. Secondly, the study investigated the impact of selected firm-specific factors on the financial flexibility of the non-financial firms listed on the JSE Limited. It further analysed the impact of selected firm-specific factors on the investment efficiency of the non-financial firms listed on the JSE Limited. Lastly, the study examined the relationship between financial flexibility and investment efficiency of non-financial firms listed on the JSE Limited. A panel of 106 non-financial firms with complete data for periods from 2000 to 2019 was constructed and used in these tests. The research hypotheses were formulated and tested using the appropriate regression models selected from the Random Effect Model (REM), Fixed Effect Model (FEM) and System Generalized Method of Moments (GMM-SYS). The study shows that financial flexibility decreases with an increase in leverage, investment opportunities, payout and finance costs. However, it increases with profitability, cash and cash equivalents and asset tangibility. Based on the study, JSE-listed firms are financially flexible and the determinants of financial flexibility in these firms are leverage, Tobin’s Q, finance cost, dividends, profitability, tangibility and cash and cash equivalents. The significant factors that determine financial flexibility in the JSE-listed non-financial firms are Tobin’s Q and finance cost as they show a significant correlation with financial flexibility. On the v other hand, dividends, profitability, tangibility and cash and cash equivalents show an insignificant relationship. Also, the study shows that investment efficiency in the JSE-listed non-financial firms increases with leverage, payout, growth options, sales growth and cash flow. It, however, decreases with financial flexibility, firm age and size. The main determinants of investment efficiency in these firm are leverage, payout policy, growth options, sales growth, cash and cash equivalents, firm age and firm size.