Impact of Operating Cash Flow on Financial Decisions: Evidence from Non-Financial Firms Listed on PSX


  • Muhammad Azhar Farooq Bahauddin Zakariya University, Multan
  • Nadeem Ahmed Sheikh Bahauddin Zakariya University, Multan


Operating Cash Flow, Investment, Financing, Dividend, Pecking Order Theory, Agency Theory


This study serves three purposes. First, to explore whether operating cash flow affect the
investment, financing and dividend decisions. Second, to investigate whether financial decisions
are interrelated. Finally, to investigate whether theories relevant to financial decisions developed in

the West provide support to understand the investment, financing and dividend behaviors of non-
financial firms in Pakistan. The data were collected from annual reports of non-financial firms listed

on Pakistan Stock Exchange during 2009-2019. Results show that operating cash flow and investment
are positively related. Firms with positive cash flow can use funds for investment activities otherwise
free cash leads to the conflict of interest between managers and stockholders. Operating cash flow,
profitability and liquidity are negatively associated to financing. The inverse relation confirms the

pecking order theory which indicates that profitable firms borrow less due to the availability of inter-
nally generated funds. Finally, operating cash flow and dividend are positively related. The positive

relation confirms the prophecy of bird-in-the-hand theory which suggests that distribution of divi-
dend reduces the cost of equity and increases share price. As control variables are concerned, firm

size andage have negative association with investment and financing. The negative relation is con-
sistent with the fact that mature firms borrow less due to availability of retained earnings. Moreover,

they invest less in the same business to avoid the problem of overinvestment. Finally, results show
that financial decisions are interrelated.



How to Cite

Azhar Farooq, M., & Sheikh, N. A. (2021). Impact of Operating Cash Flow on Financial Decisions: Evidence from Non-Financial Firms Listed on PSX. Journal of Business & Economics , 13(2), 68-86. Retrieved from