An Empirical Analysis of the Relationship between Cash Flow and Dividend Changes in Nigeria

The purpose of this study is to re‐evaluate the incremental information content of cash flows in explaining dividend changes, given earnings. I carry out an 882 firm‐year study by analysing the dividend changes‐cash flow relationship on a sample of 63 quoted firms in Nigeria over a wider testing period from 1984 to 1997. Despite the fact that I used a wider testing period than previous studies and more refined cash flow measures than previous studies, I also introduced dummy variables to capture economic policy changes in the economy. The association of cash flows with dividend changes is tested using the modified Lintner‐Brittain model as adopted in Charitou and Vafeas (1998) on pooled cross sectional/time series data from the full sample of observations from 1984‐97. The models are estimated using the ordinary least squares (OLS) method and I do find a significant relationship between dividend changes and cash flow unlike previous studies. The empirical results reveal that the relationship between cash flows and dividend changes depend substantially on the level of growth, the capital structure choice, size of each firm and economic policy changes.