Abstract
The purpose of this research is to investigate whether there is an optimal cash holding ratio, in which firm’s performance can be maximized. The threshold regression model is applied to test the threshold effect of the cash holding ratio on firm’s performance of 306 non-financial companies listed on the Vietnam stock exchange market during the period of 2008–2017. Experimental results showed that a single-threshold effect exists between the ratio of cash holding and company’s performance. A proportion of cash holding within a threshold of 9.93% can contribute to improvement of the company’s efficiency. The coefficient is positive but tends to decrease when the cash holding ratio passes the 9.93% check point, implying that an increase in cash holdings ratio will continue to diminishment of efficiency eventually. Therefore, the relationship between cash holding ratio and firm’s performance is nonlinear. From this result, this paper provides policy implications for non-financial companies listed on the Vietnam stock exchange market in determining the proportion of cash holding flexibly. In detail, non-financial companies listed on the Vietnam stock exchange market should not keep the cash holding ratio over 9.93%. To ensure and enhance the company’s performance, the optimal range of cash holding ratios should be below 9.93%.
Highlights
The amount of cash held plays an important role in most companies because it provides the ability to pay in cash and directly affects the performance of the company
All of these variables were calculated based on the financial information collected from the balance sheet and income statement of 306 non-financial companies listed on the Vietnam stock exchange market in the period of 2008–2017
Note: representing profitability (ROA) represents company performance, measured by profit before tax and interest on total assets; cash holding ratio (CASH) represents the percentage of cash held by the company, measured by the ratio of money and cash equivalents to total assets; MB represents company growth, measured by market value over book value of stocks; SIZE represents company size, measured by Ln; LEV represents company leverage, measured by total debt over total assets
Summary
The amount of cash held plays an important role in most companies because it provides the ability to pay in cash and directly affects the performance of the company. If the company holds a large amount of cash, the opportunity cost will arise. If a company holds too little cash, it may not be enough to cover the regular expenses. The amount of cash held by the company must be sufficient to ensure regular operations solvency, contingency for emergencies, and future projections (if needed). Dittmar and Mahrt-Smith (2007) stated that in 2003, the sum of all cash and cash equivalents represented more than 13% of the sum of all assets for large US firms. Al-Najjar and Belghitar (2011) found that cash represents, on average, 9% of the total assets for UK firms. In Vietnam context, the cash and cash equivalents account for more than 10% of total assets of firms. Cash represents a sizeable asset for firms. Cash management may be a key issue for corporate financial policies
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