The Association between Operating Cash Flows and Dividend Changes : Evidence from Jordan

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
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,
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.

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