Ownership Hierarchy and Cash Holding: A Study From Pakistan

Muhammad Nabeel Safdar,Saba Amin,Tian Lin,Papel Tanchangya

doi:10.5430/ijfr.v10n6p67

Muhammad Nabeel Safdar, Saba Amin + Show 2 more

Open Access

https://doi.org/10.5430/ijfr.v10n6p67

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Abstract

This study aims to investigate the impact of the ownership hierarchy on the retention of cash. Ownership structure has dissimilar from each organization as some firms have surplus cash holdings and some firms have fewer cash holdings. This study examines the pattern of shareholding in Pakistan and its consequences on holding of cash. Trade-off theory, peaking-order theory, and agency theory have already hashed out the sensation between cash holding and ownership structure. Fixed Redundant likelihood test, Hausman Test and Panel Data Regression model are used to compute the final results. This study involves 74 non-financial firms to investigate the prime effects. The data have been taken from the biggest database of Karachi Stock Exchange (KSE) 100 index Pakistan and company financial reports from the period 2006 to 2017. Significant findings of this paper are based on two different research questions. First, how the pattern of shareholding has an impact on the decision of cash holding? Second, how the boundaries of the firm affect cash holding? These findings imply that cash holding and ownership structure are a vital element of the firm’s financial policy. This paper concludes that there is a negative and substantial relationship between cash holding and the pattern of shareholdings and the boundaries of the firm have an imperative effect on the holding of cash.

Highlights

With a globally integrated economic and political system, ownership hierarchy becomes a fundamental issue in the real world
The results indicated the part of each shareholding, which are 62% of individual shareholdings, 8% of institutional shareholdings, 26% of investment companies’
The coefficient of IND relation is not so strong, it clearly stated that Pakistani’s firms hold less cash or maintain only necessary cash reserves to meet their operational activities. It indicated that when an individual pattern of shareholding increases, cash holding decreases and firms moves outward for financing as this study reveals the results of leverage

Summary

Introduction

With a globally integrated economic and political system, ownership hierarchy becomes a fundamental issue in the real world It runs a vigorous part in an organization because it is important as the capital for the firm’s and there is no mean of survival without capital. The ownership structure defined as the percentage of capital mix according to the shareholders and it has a more significant impact on firms’ performance (Sun, Ding, Guo, & Li, 2016). These capital mixes have core significance in the real business because it is the sole key to differentiate the shareholders from each other to let them know about their profitability. A firm cannot retain much capital to fulfill their short-term goals because they set up the finances from outside at zero costs immediately (Wali Ullah, Zahid, Khan, & Islam, 2018)

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