Demystifying the Relationship between Corporate Cash Holdings and its Determinants in Indian Firms

Abstract

There are two schools of thought regarding cash policy, where one sect finds cash policy is insignificant in today’s perfect capital market condition and the other feel corporate cash policy is the key determinant of company growth and success. Corporates constantly balance in maintaining cash reserves to cushion against future contingencies. Shortage of liquid assets may affect the operation of the firm. Cash management of any firm is bounded by precautionary, transaction, and speculative motives. Various predominant factors influence a company’s cash reserve policy. The natures of business and R&D expenditure are a few key determinants that demand a firm to maintain a certain level of cash. At the same time maintaining an optimum cash balance is becoming hypothetical under the current scenario. The Company must take an optimum cash policy so that it should not remain ideal without generating any return. This paper is to analyze the impact of cash policy and cash holding patterns of Indian firms. The paper has tried to uncover certain determinants of cash holding. The study highlights the relationship between variables such as cash ratio, leverage, and size of the firm. Panel data regression and the Random Effect model are used. The sample for the study is non-financial companies with ten years data set.