Pecking Order and Signaling Theories Applicability in Non-Financial Firms in Sub-Saharan African Countries

ABSTRACT

This study examines pecking order and signaling theories applicability in non-financial firms in Sub-Saharan African countries. Specifically, the study examined the effects of total debtto-equity, effective tax rate, and earnings on cashflow of quoted non-financial firms in SubSaharan African countries to determine the applicability of pecking order and signaling theories focusing on six selected countries with well-established capital market namely, Nigeria, South Africa, Ghana, Kenya, Malawi and Mauritius. The study employed longitudinal research design to study the behaviour of a number of nonfinancial firms over a period of time between 2013 to 2022. Stratified and filtering sampling techniques were used to select the six Sub-Saharan African countries and 216 firms with available data for the period ranging from 2013 to 2022 were used. The empirical methodology was structured in order to apply actual company data to test existing theories. For the purpose of analysing the dynamic relationship among the variables as specified in the models and its robustness checks to avoid simultaneity bias, the study employed the generalised methods of moments estimator specifically, the system-generalised methods of moments estimator. Based on the analysis, the study found that the average cashflow to asset ratio is 0.06, which is generally similar to the average value for the individual country-dataset for Nigeria, Ghana, Kenya, Malawi, and Mauritius but lower than the South African average which signifies that South Africa appears to have higher cashflow than other Sub-Saharan African Countries. Secondly, the study found that debt-to-equity ratios, and earnings have a significant impact on cashflow among the Sub-Saharan African firms while effective tax rate has a negative significant impact confirming the pecking order effect on the sampled firms but found no signaling effects on the firms. It is therefore recommended that firms need to estimate debt- optimising financing position which they seek to attain in order to ensure long-term sustainability of both debt and investment. Policy makers also need to improve market development to address market imperfections and optimal capital flow among Sub-Saharan African countries.