Sensitivity of Cash Positions to Leverage and Firm Size of Selected Listed Manufacturing Firms in Nigeria

Nnado Celestine Ifeanyi ,Onyeka Virginia Nnenna ,Ugwu Collins Chukwuma

doi:10.7176/rjfa/11-6-08

Abstract

The study examined the empirical relationship between firm size, financial leverage and level of cash and cash equivalents of selected quoted manufacturing firms in the Nigerian Stock Exchange. Ex-post-facto research approach via panel least squares was employed to assess the nature and extent of association between these variables. Data were collated from the audited annual reports of thirty-seven (37) manufacturing firms for the thirteen year period: 2006-2018. Diagnostic tests were carried out on the collated data using Levin-Lin-Chu panel unit-root test which confirmed their stationarity and Westerlund Panel Cointegration Tests that depicted the variables were not cointegrated in the long run. Hypothetical statements tested using panel least squares revealed that while financial leverage (Lev) exerted insignificant negative influence on the firm’s level of cash and cash equivalents, natural logarithm of total assets exerted insignificant but positive influence on cash holdings. These imply that firms keeping insufficient liquid assets may be forced to borrow from external sources at exorbitant costs or become illiquid. The effects of the control variables are, however, statistically relevant. Keywords: financial leverage, cash holding, firm size DOI: 10.7176/RJFA/11-6-08 Publication date: March 31 st 2020

Highlights

1.1 Background of the Study Trade and other payables including debenture holders rely on the credit worthiness of manufacturing firms that depend on them being liquid enough to honor debt covenants and other maturing liabilities as they fall due
The findings indicate the existence of high speed of adjustment for firms with levels of cash above the optimal level
The results showed that cash holdings (CH) of Pakistani non-financial firms is positively and significantly influenced by cash flow volatility, market-to-book ratio, profitability and firm size

Summary

Introduction

1.1 Background of the Study Trade and other payables including debenture holders rely on the credit worthiness of manufacturing firms that depend on them being liquid enough to honor debt covenants and other maturing liabilities as they fall due. This is facilitated with effective and efficient management of the firms’ cash and liquid substitutes. Most recent studies incorporating quantitative panel methodology focused on firm specific factors rather than macroeconomic / external factors exerting significant influence on cash positions of firms. Use of cash flow analysis, cash budgets and financial / liquidity ratios ensures necessary adjustments are made by the firm in this post GFC era to avoid illiquidity (Mizen, 2008; Abushammala and Sulaiman, 2014)

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