Abstract
This study aims to investigate the direct relationship between precautionary cash holdings, cash flow volatility and the financial constraints of Pakistani firms for the period 2003–2013.The study also takes into account the 2008 financial crisis. This study seeks to discover that if a firm is financially constrained and its cash flows are highly volatile then it will increase its cash holdings and voluntarily reduce its current investment level due to the intertemporal trade-off between current and future investments. Thus, a positive relationship between cash holdings and future cash flow volatility and a negative relationship between current investments and future cash flow volatility is expected. In order to test the impact of cash flow volatility firms are classified in to constrained and unconstrained groups on the basis of four criteria, i.e., firm size, dividend payment, Kaplan-Zingales (KZ) index and group affiliation. For each criterion estimation is done by using two steps Generalised Method of Moments (GMM) estimator. Results show that financially constrained firms increase their cash holdings when cash flow volatility increases while financially unconstrained firms do not, except for KZ index criteria. It is also found that during the 2008 financial crisis constrained firms were more prone to saving cash than unconstrained ones. The study provides important insights into understanding the behaviour of Pakistani firms relating to cash holdings when they are financially constrained and cash flows are highly volatile. This is the first study of its kind that establishes a conclusive relationship between precautionary cash holdings, cash flow volatility and financial constraints in a Pakistani context.
Highlights
Keynes (1936) has explained two major benefits of holding cash
There are studies which have explained that cash flow volatility could affect a firm’s cash holding behaviour. These studies suggest that firms use internally generated funds to hedge against future cash flow uncertainty and to increase their cash holdings in response to increase in cash flow volatility. This is the first study of its kind which has provided a direct analysis of the relationship between cash holdings, cash flow uncertainty and financial constraints in the context of Pakistan
Cash holding policies of constrained firms are more conditioned on the cash flow volatility while for unconstrained firms no such relationship holds. This empirical chapter examines the relationship between financial constraints, cash holdings and cash flow volatility in the presence of financial crisis 2008
Summary
A firm can save transaction cost by using cash to make payments rather than raising fund externally. Cash holdings can be considered valuable assets of the firm when other sources of funds are insufficient to fulfil the firm’s demand for capital. This situation become more pronounced when firms face external financing constraints to fund. In support of this view, several studies reported that firms with greater difficulties in obtaining external capital save more cash than firms with fewer frictions (see, for example, Almeida, Campello, & Weisbach, 2004)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
