The Effect of Corporate Cash Holdings on Stock Returns

Abstract

In this research work the effect of corporate cash holdings on stock return is analyzed in which panel data is used from Pakistani listed firms which are listed in KSE for the period 2007-2013, the firms are selected randomly having sample size of 120 which is then is divided into sixty small and large firms on the basis of their total assets respectively, the nature of our data is panel for which we have used panel data regression, panel data regression involve three models which are pooled ols, fixed effect model and random effect model, in order to find out the most appropriate model we have used three tests including chow test, Breusch-pagan test and Hausman test, based upon the p-values of the tests it is suggested to use the fixed effect model. White test is used to find out the presence of heteroscedasticity, VIF is used to find out the presence of multicolinearity in the data, As small and large firms are parts of this research. In the case of large size firms there is negative relationship between the return on stock and holding liquid assets and which usually enforce them to prefer internal financing rather than external financing because of various costs associated with external financing. In case of small size firms positive association is shown which is based on the fact that small size firms usually have poor credit ratings and have no easy access to the capital markets therefore they held more cash which has a positive effect on their stock return. And the overall effect again shows positive relationship between cash holdings and stock return, so this is a situation in which the firms usually face an equilibrium position between the payment of dividends and also to keep cash in the form of retain earnings.