Abstract
Using a sample of 280 firms listed on the Pakistan Stock Exchange, we empirically investigate factors that determine corporate cash holdings in different periods from 2005 to 2014. We divide the sample into three sub-periods—pre-crisis, crisis, and post-crisis—and apply a panel data model to estimate the results. The results suggest that financial crises affect firms’ cash holdings policies. Further, findings show that financial crisis has influenced the relationship of size and leverage with cash holdings. In particular, cash flow, liquidity, and tangibility are major determinants of cash holdings in the sub-periods. We present important implications for corporate managers, academicians, and policymakers.
Highlights
Corporate cash holdings have been extensively studied in the finance literature
Considering the above, we investigate factors that determine corporate cash holdings in Pakistan’s emerging economy
In the same period, the mean values of cash flow, growth, and liquidity decline, and we find an increase in the volatility of some variables (CAP, CF, and G)
Summary
Corporate cash holdings have been extensively studied in the finance literature. Firms need cash for various reasons, such as day-to-day operations, to finance growth through profitable operations, to retire mature debts, for paying taxes, and for pre-cautionary motives (Kafayat et al 2014; Opler et al 1999; Uyar and Kuzey 2014). Maintaining excessive cash reserves has both advantages and disadvantages. On the one hand, firms need excessive cash reserves to prevent financial distress and precautionary motives. Excess cash may incur opportunity costs by way of forgoing profitable projects (Uyar and Kuzey 2014). There is still no consensus on how much cash amount firms need on their balance sheet
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