Abstract
Liquidity is a firm’s ability to pay its current obligations as they come due and thus remain in business in the short run, which reflects the ease with which assets can be converted to cash. The objective of working capital management (WCM) is to minimize the cost of maintaining liquidity while guarding against the risk of insolvency, working capital policy applies to short-term decisions, and capital structure finance applies to long-term decisions.Several studies have been conducted on the impact of WCM on cash holding levels. The impact of WCM on liquidity and cash holding levels is analyzed in this study. The study also makes a comparison between large- and small-scale firms. Panel data for 62 Jordanian industrial firms covering an eleven-year period (2006–2016) have been analyzed. The descriptive analysis indicates that large firms hold more cash than small firms, as well as more debt, cash flow and growth.The findings of the data set indicate that WCM, as a variable (working capital net of cash), is a strong predictor of firm cash holding levels. When a firm has several cash substitutes, it will maintain low cash levels. The separate analysis shows that there are significant differences between small- and large-scale firms for determinates related to cash holding levels. Firm size and cash flow ratios were strong predictors of cash holding levels for both samples.
Highlights
Working capital is the difference between a current asset and a current liability of an organization
The objective of working capital management (WCM) is to minimize the cost of maintaining liquidity while guarding against the risk of insolvency, working capital policy applies to short-term decisions, and capital structure finance applies to long-term decisions
Several studies have been conducted on the impact of WCM on cash holding levels
Summary
Working capital is the difference between a current asset and a current liability of an organization. Firms can enhance their liquidity position by virtue of increasing the amount of working capital. Firms take into consideration the trade-off between risk and return, so WCM focuses on the quality of current asset items. The quality of working capital takes into consideration whether a firm holds sufficient assets to cover its liabilities and to ensure that it has regular, sufficient, and consistent cash flow to fund its activities. The way that working capital is managed has a significant impact on the cash holding levels of firms. Firms need to manage working capital as a substitute of cash holdings due to the following: if a firm’s WCM is efficient, the need to hold onto cash is reduced
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