Abstract
This study aims to examine the connection between cash level and corporate performance, as well as the cash level determinants for all nonfinancial firms in the Gulf Cooperation Council (GCC) countries. The empirical analysis employs numerous statistical techniques such as panel regression models and the Generalized Methods of Moments (GMM). The main result of the study confirms a positive relationship between the cash level and both the corporate performance and the firm value, which signifies the role of cash in supporting the corporate productive activities in times of rare cash. The results also show that large firms, especially those with less leverage, experience better corporate performance. Additionally, the results demonstrate that when using different levels of cash holdings as well as different levels of firm size, both the magnitude and the significant positive effect of the cash level on corporate performance and firm value are not altered. For the determinants of the cash level, the results confirm that the most important variables are product competition, free cash flow, corporate liquidity, capital expenditures, and financial constraints. The results do not confirm that the amount of dividend paid has a significant influence on the cash level. All results are robust to the various econometric specifications employed in this study. AcknowledgmentThis study is supported by Kuwait University research sector, grant number IF-03/18.
Highlights
The optimal cash level that firms should hoard is debated by both academics and practitioners
This study aims to examine the connection between cash level and corporate performance, as well as the cash level determinants for all nonfinancial firms in the Gulf Cooperation Council (GCC) countries
The results show that GCC firms seem naturally ent cash levels on corporate performance is testinclined to accumulate more cash, probably due to ed by regressing both the firm ROA and Tobin’s the knowledge that they have full access to inter- Q against different levels of cash holding
Summary
The optimal cash level that firms should hoard is debated by both academics and practitioners. There is a secular increase in the accumulation of cash by firms (see, for example, Bates et al, 2009) This increasing trend towards cash level buildup has attracted the attention of both researchers and investors interested in identifying the causes and consequences of increasing corporate cash level over time. This study investigates the firm-specific cash level determinants for nonfinancial firms in the Gulf Cooperation Council (GCC) countries. GCC firms carry out business in a tax-free economy, which may have a bearing on the pre-established evidence on the determinants of cash level. Countries tends to create a relatively constant source of financing which, in turn, tends to deter GCC corporate managers from behaving optimally in their business-related decision making, especially with regard to the optimal corporate cash level (Alshammari, 2018).
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