Monetary Policy and Corporate Finance Decisions of Firms: Evidence from Selected Sub-Saharan African Countries

Abstract

The importance of corporate finance in firm growth and economic development is an issue of significant importance. There has been a lot of attention on factors that affect corporate finance decisions. Macroeconomic tools, such as monetary policy, have been identified as major determinants of interest rates, cost of capital, and savings, amongst others, which in turn affect investment, financing, and working capital management decisions. Conclusive studies that examine whether monetary policy affects corporate finance decisions of firms in Africa, especially in sub-Saharan Africa (SSA), remain scarce. This study, therefore, seeks to critically examine whether monetary policy affects the corporate finance decisions of firms in selected SSA countries. The research used the system generalized method of moments (sys-GMM) estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998) to examine the relationship between monetary policy and corporate finance decisions. The study used panel data on 50 listed non financial firms from 2010 to 2022 from the four largest stock exchange markets in sub-Saharan Africa, namely: Ghana, Nigeria, South Africa, and Kenya. The results of the study indicates that contractionary monetary policy negatively affects investment, financing decisions, and overall working capital management. The study also found that a firm’s size and economic growth affect the impact monetary policy has on corporate investment and financing decisions. Furthermore, firm-level variables such as firm age, size, leverage, earnings, Tobin’s Q and MPR dummy are noted to have an impact on firms' corporate finance decisions. The study contributes to the corporate finance literature by examining whether monetary policy affects corporate finance decisions in selected sub-Saharan African countries. The findings of this study have implications for policymakers