Oil price volatility and corporate cash holding

Abstract

Since it is believed that oil price movements highly influence economic growth in oil-rich countries, this study examines the influence of oil price volatility on corporate cash holdings and adjustment speed and tests whether firms in the petrochemical industry are affected differently from firms in other industries. This study addresses these research questions using static and dynamic system GMM models on a sample of non-financial firms listed in Gulf Cooperation Council (GCC) countries between 2005 and 2019. The results of this study assert that oil price volatility has a significant impact on cash-holding decisions. Specifically, the study displays a positive and significant relationship between oil price volatility and firms' cash holdings. Again, the study discovers that firms adjust towards their target cash-holding level faster during high oil price volatility than during periods of low oil price volatility. Consistent with the trade-off theory, the study unveils that precautionary motive is a crucial factor motivating firms to retain large amounts of cash. The results also showed that firms in the petrochemical industry have a higher cash-holding ratio than firms in other industries. These results support the view that oil price volatility exposes oil-related industries to a higher uncertainty than other industries. Moreover, the findings are robust to an alternative measure of oil price volatility and model specifications.