Operating Cash Flow and Dividend Changes as a Management Tool for Planning and Making Decision
Abstract
The main objective of this study was to examine whether operating cash flows have incremental information beyond operating net income in explaining dividend changes for a sample of Jordanian industrial firms listed on the Amman Stock Exchange (ASE) during the period 2010-2016 Arguments for operating cash flow information suggest that it is better than accrual net income in reflecting the firm performance and in measuring the firm liquidity. Both performance and liquidity are viewed as significant factors influencing a firm’s dividend policy. To examine this, operating cash flow, operating net income and lagged dividends were incorporated in a regression model. The results of this model indicated that the only significant variables explaining dividend changes were operating net income and lagged dividends with positive and negative coefficients, respectively. An attempt was also made to address the problem of nonlinearity in the relationship between cash flow and dividend changes. The sample of the industrial firms were divided into two groups (high growth and low growth firms) based on market to book value ratio. The results of the two regression models provided evidence consistent with the superiority of accrual operating net income over operating cash flow in explaining dividend changes. The results of this study suggest that Jordanian industrial firms base their dividend policies on accrual net income rather than on cash flows. One possible consequence of this suggestion is that cash dividends are not internally financed and as a result, this would deteriorate the liquidity and solvency position of a firm.Submission of an article implies that the work described has not been published previously (except in the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, will not be published elsewhere in the same form, in English or in any other language, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication.
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