Determinants Of Cash Holdings Research Articles

A sectoral perspective on corporate cash holdings

The main purpose of this research is to investigate the cash holdings behaviour on sectoral level for South African firms listed on the Johannesburg Stock Exchange (JSE). The accounting cash ratio is used to identify abnormal (excess) cash holdings for the firms listed on the JSE. This informed the panel regression analysis to identify cash holdings determinants on a sectoral level. The sample data included 255 firms of which 102 represent Financial Firms and 153 represent Non-Financial Firms for 2005 to 2019. The findings show the significant internal and external determinants of cash holdings. Comparing coefficient sizes, this research finds that financial and non-financial sectors with abnormal (excess) cash holdings exhibit higher coefficient sizes as opposed to sectors without. As a result, the higher coefficient size shows that the internal and external determinants of cash holdings have a greater effect on the cash holding levels of these sectors. The implications of the findings of this study are that each sector operates differently and that each firm within each sector has differing cash management policies and procedures. Therefore, analyzing cash holdings behaviour on an aggregated level and assuming that all sectors and firms within the collective operate the same is an erroneous assumption, as shown by this study. This research firstly contributed by introducing the use of the accounting cash ratio to indicate the presence of abnormal (excess) cash holdings. Most research focus on cash holdings of Non-Financial Firms. Therefore, the second contribution of this research is that both Non-Financial and Financial Firms with and without abnormal (excess) cash holdings were included to identify determinants of cash holdings, this was also done on a sectoral level.

Does firm-level teamwork culture affect cash holdings?

PurposePrior literature on the cultural determinants of cash holdings focuses on time-invariant cultural variables measured at the geographical level. These measures of culture do not capture the firm-level variation in corporate culture. Using a validated time-variant measure of firm-level corporate culture, specifically teamwork, we examine the effect of teamwork on a firm's cash holdings.Design/methodology/approachIn this paper, we explore the effect of corporate teamwork culture on firms' cash holdings. Using sudden CEO turnover as an exogenous shock to a firm's teamwork culture, we find teamwork increases cash holdings. Also, we test and find two channels—financial constraint and agency—and two new labour-related channels—human capital quality and labour inefficiency—through which teamwork culture affects cash holdings. Our results are robust to endogeneity tests.FindingsWe find that teamwork increases the cash holdings of firms. We find that a firm with a high teamwork culture has higher cash holdings: an increase of one standard deviation in teamwork leads to a 14.6% rise in the mean cash holdings.Originality/valueTo our knowledge, our study is the first to introduce the firm-level teamwork cultural construct as a determinant of cash holdings.

How did the COVID-19 pandemic affect Corporate Cash Holdings Determinants? An Applied Study on Saudi Arabia Firms

The COVID-19 pandemic has introduced substantial uncertainty and economic disruptions, prompting numerous firms to increase their cash reserves as a significant advantage to enable effective management of exogenous shocks. Using a sample of 120 non-financial firms listed on the Saudi Stock Exchange between 2012 and 2022, we examine the determinants of cash holdings. By dividing the sample into two sub-periods: pre-Covid and under Covid and applying the panel data approach, the results show a significant difference between the determinants of cash holdings of the two groups of firms. During the COVID-19 pandemic, cash holding has increased with firm size, cash flow, Cost of Capital, and net working capital, while it has decreased with dividend payment, and return on invested capital. The research provides support for the pecking order theory, indicating that Saudi firms have maintained relatively stable cash management policies and remained unaffected throughout the pandemic. This study sheds light on the supportive role of the Saudi government in assisting firms facing liquidity challenges, offering a comprehensive understanding of the subject. Furthermore, it contributes to the existing literature on corporate finance by exploring new factors that drive cash management decisions.

Determinants of Cash Holdings in State-Owned Enterprises Listed on the Indonesia Stock Exchange during the Period 2015–2021

This research was conducted to empirically investigate the determinants affecting the cash holdings of state-owned enterprises in Indonesia. The sample consisted of 15 state-owned companies listed on the Indonesia Stock Exchange (IDX) over a 7-year period (2015-2021). The study employed the ordinary least squares (OLS) research model. The results of this research indicate that leverage and BI rate significantly affects the cash holdings of state-owned enterprises in Indonesia. However, cash flow volatility, and capital expenditure do not have a significant impact on cash holdings. This study contributes to the literature on the determinants of cash holdings in state-owned enterprises in Indonesia.

Cash Holdings Determinants: The Case of Malaysian Local Authorities

This paper investigates the determinants of cash holdings by Malaysian local authorities. The researchers seek understanding on the motivation/intention behind the pattern of cash holdings and the theory that may be able to explain why the local authorities hold such amount of cash. Extensive research affirms that organizations in the private sector possess reasons to maintain cash, encompassing transactional, precautionary, and speculative objectives. The pecking order theory, trade-off theory, and free cash flow theory are also significant frameworks that explain why individuals, businesses, and institutions hold cash. However, there has been limited investigation into the factors influencing cash holdings in the public sector, particularly among local authorities in Malaysia. Therefore, relationship between the local authorities’ size, growth opportunities, financing deficits, liquidity, leverage, capital expenditure and access to credit market and cash holdings in Malaysian local authorities is examined. The sample in this study is 37 districts in Malaysia and data is collected from financial statements of the studied districts between 2015 and 2019. Thus, the total observations in this study are 185 districts-years.

A sector-wise analysis of the determinants of cash holdings in listed firms in Mauritius

A sector-wise analysis of the determinants of cash holdings in listed firms in Mauritius

Asset redeployability and corporate cash holdings

PurposeThe purpose of the study is to investigate the impact of asset redeployability on the level of corporate cash holdings.Design/methodology/approachThe authors use regression analysis to examine the relation between asset redeployability and corporate cash holdings.FindingsUsing a large panel sample of US public firms from 1990 to 2020, the authors find a significant positive relation between asset redeployability and cash, which suggests that firms with more redeployable assets hold more cash.Originality/valueThe authors contribute to a growing literature in accounting and finance that investigates the impact of asset redeployability on firm characteristics and also contribute to the literature on the determinants of cash holdings.

Cash Holdings and Marginal Value of Cash across Different Age Groups of U.S. Firms

Using a sample of 11,365 unique US firms over the period 1966 to 2021, this study examines the relationship between the age of a firm and its cash holdings. We categorize firms as young, mature, or old based on their age or years of operation. Our results show that firm age is one of the important determinants of cash holdings and that managers adjust cash holdings in response to changing financial needs and risks as firms age. We find that young firms tend to hold higher levels of cash than more established firms and that the marginal value of cash holdings is higher for younger firms. This is consistent with the notion that young firms are more focused on growth and investment and may have limited access to external financial resources. In contrast, mature and old firms tend to hold lower cash levels, possibly due to greater financial stability, increased creditworthiness, and a lower need to manage financial risks. Controlling for significant variables, we confirm our findings with the robustness tests. Taking care of the endogeneity issue, we still can confirm that firm age is negatively significant to the level and the marginal value of cash holdings.

Stock Liquidity and Cash Holdings: Evidence from Malaysia

The level of cash held by listed companies has raised academic interest. In particular, many studies have been conducted to understand the reason why companies hold so much cash. Previous studies on the determinants of cash holdings have focused on firm-specific characteristics. More recently, researchers have found that stock liquidity played an important role in explaining the cash holding behaviour. This study examines the effect of stock liquidity on cash holdings among listed companies in Malaysia. The findings indicate that stock liquidity has a positive impact on cash holdings. This suggests that companies have a higher propensity to hold cash to repurchase its own stocks, which resulted in higher stock liquidity.

Determinants of Cash Holdings: Evidence from Listed Pharmaceutical Companies in Nigeria

This study assessed the determinants of cash holdings of quoted pharmaceutical firms in Nigeria from 2014-2022. Three hypotheses were formulated in line with the objectives of the study. Ex-post facto research design and panel data were adopted and the data for the study were obtained from fact books, annual reports and account of the quoted pharmaceutical firms under study. Pearson coefficient of correlation and Panel least square regression were applied for the test of the three hypotheses formulated with aid of E-View 9.0 statistical software. Findings showed that market-to-book value ratio, investment in non-current assets and cash flow have a significant but negative significant relationship with cash holding (proxied by cash and cash equivalent) at 5% significant level. Based on these findings, the study recommended among others that pharmaceutical firms should adopt cash management practices since cash reduces the burden to perform well and allows managers to invest in projects that best suit their own interests.

The impact of earnings quality on corporate cash holdings: evidence from an emerging economy

Purpose This study aims to inspect the impact of earnings quality on corporate cash holdings of Jordanian companies listed on the Amman Stock Exchange. Design/methodology/approach This study examines a large sample of (98) Jordanian companies listed on the Amman Stock Exchange during the period that ranges from 2009 to 2019. Earnings quality was computed using two different methods; firstly, through the absolute abnormal discretionary accruals (as an inverse measure of earnings quality), which were estimated using the Dechow et al.’s (1995) cross-sectional version of the Modified Jones model and the Kothari et al. (2005) model; and secondly, through earnings persistence as a direct measure of earnings quality. Findings The empirical results of this study reveal that poor accounting quality (high levels of abnormal discretionary accruals) is associated with higher levels of cash holdings, implying that as the quality of earnings decreases, the harmful effects of information asymmetry and adverse selection costs will increase, leading, therefore, Jordanian companies to increase their corporate cash holdings levels to act as a buffer against any cash shortages. Further, the authors document that higher accounting quality (more persistent earnings) is associated with lower levels of cash holdings. In addition, this study found that earnings quality negatively and significantly affects the cash holdings of profitable companies in Jordan. Thus, earnings quality appeared to be a significant determinant of cash holdings for profit-making companies but not for companies enduring losses. Originality/value This study contributes to the limited evidence that investigates the relationship between earnings quality and corporate cash holdings. Where the majority of previous studies have focused on developed economies, to the best of the authors’ knowledge, this study is the first in Jordan to comprehensively explore the relationship between earnings quality, computed by the absolute abnormal discretionary accruals and earnings persistence, and corporate cash holdings. Also, it is the first to explore the nature of the earnings quality-cash holding nexus in loss-making companies compared with their profit-making counterparts to the best of the authors’ knowledge. The results of this study have important policy implications for managers, creditors, investors and academics in Jordan and other emerging economies that share similar characteristics.

The impact of geopolitical risk on cash holdings policy: evidence from an emerging market

PurposeThis study aims to examine whether geopolitical risk (GPR) impacts the cash holdings behavior of 210 Turkish firms between 2005 and 2019. The authors choose Turkey as a country of interest because Turkey has an important place in terms of geographical location and serves as a bridge between Europe and Asia. Considering the prominent role that can play in decision-making processes, the authors thought that analyzing the impact of GPR on the cash holdings determinants of Turkish firms would be important and interesting. A widely accepted view is that GPRs play an important role in the economic decisions of emerging countries, such as Turkey.Design/methodology/approachThe authors examine models with fixed effects (FE), random effects (RE) and pooled ordinary least squares (POLS), respectively. First, the authors analyzed whether POLS, FE or RE would be the most appropriate model. According to the F-test and the Breusch–Pagan LM test, the FE and the RE models are more suitable than POLS. Then, according to the Hausman test results, the authors found that FE is this study's most appropriate model. After determining the validity of FE, the diagnostics tests of heteroscedasticity, autocorrelation and serial correlation tests are examined. Due to the presence of these problems, Driscoll and Kraay's (1998) test, which is the robust standard error estimator, is used.Findings The authors find a positive relationship between GPR and cash holdings after controlling firm-level control variables. Firms faced with uncertainty prefer to hoard cash as a precautionary measure. In keeping with real options theory, firms postpone the investments of firms under uncertain conditions. The use of alternative measurements for GPR and cash holdings ensures the validity of our results. The authors' research reveals that investors and politicians should pay more attention to the influence of GPR on the determinants of the cash holdings of firms.Research limitations/implicationsThere are limitations for this study, but this study may provide opportunities for further studies. First, this study has only data from Turkey. This situation mitigates cross-country effects. In future studies, the number of firms, countries of focus and time span can be expanded. Second, this study does not consider the period of coronavirus disease 2019 (COVID-19) that increased risk and uncertainty worldwide. Further studies may consider the impact of COVID-19 and geographical risks relating to cash holdings. Third, the authors try to choose more relied independent and control variables.Practical implicationsThe authors' results provide some insights that are relevant to practitioners and policymakers. Managers need to consider GPR in managers' financial decisions based on managers' firm-specific characteristics. Turkish policymakers should target improving policies to alleviate the negative effects of GPRs. Regulators should postulate more encouraging policies to firms in an environment of GPR. Regulators can give firms more time to understand and analyze the GPRs and the impacts of GPRs to adjust regulators' day-to-day activities.Originality/valueThere are fewer studies in the literature that analyzed the relationship between GPR and cash holdings. This study aims to full this gap in the literature.

A sector-wise analysis of the determinants of cash holdings in listed firms in Mauritius

A sector-wise analysis of the determinants of cash holdings in listed firms in Mauritius

SOURCES AND DETERMINANTS OF CASH HOLDINGS IN THE AGRICULTURE OF CENTRAL AND EASTERN EUROPE COUNTRIES AND THE PERSPECTIVE OF THE FINANCIAL SECURITY OF POLISH FARMS

Ensuring business continuity requires maintaining financial liquidity and a certain level of cashholdings. This also applies to farms whose owners obtain funds from various sources, includingforeign capital. For this reason, the study aimed to identify sources and determine cash resourcesin farms in Central and Eastern European countries that are in the EU. Additionally, based ondetailed data from Polish farms, we assessed and compared the importance of cash holdings infarms characterised by a high level of financial security and those for which we identify thebankruptcy risk. Data for the research is from the Farm Accounting Data Network (FADN) databasefor 2013-2018 (for all the EU countries we consider). In the analysis touching upon bankruptcy riskin Polish farms, we used data from FADN-PL for 2010-2018. In the study, we used the panel method– weighted least squares method (WLS). We applied the dynamic approach to calculate the cashholdings. Inferences from our study indicate that budget support for farmers and sales value perfarm are the main sources and determinants of cash holdings in farms in New Member State of theEU. It should be underlined that the influence of budget support on cash holdings in Polish farmswas weaker than in other surveyed countries. Moreover, it was found that the level of indebtednesswas also an important factor that impacted cash holdings. On Polish farms, the impact of the debtlevel on cash holdings was negative, and in other countries – positive.The added value of work is identifying factors that affect cash holdings changes, so it is a dynamicapproach to cash holdings.

What drives corporate cash holdings in MSMEs?: Evidence from India

PurposeThis study investigates the factors affecting corporate cash holdings for a sample of 598 Indian Micro, small and medium-sized enterprises (MSMEs) for nine years (2011–2020).Design/methodology/approachThe system generalized method of moments (GMM) approach is used to examine the determinants of cash holdings in the Indian MSME context.FindingsThe article shows liquidity, cash flow, leverage, firm size, probability of financial distress and cash flow volatility significant in explaining cash holding decisions for MSMEs in India. No evidence of firm age and growth opportunities as determinants of cash holdings in Indian MSMEs has been found. In addition, strong evidence of cash flow volatility, cash flow and liquidity in differentiating the cash holding decisions in the service and manufacturing industry has been documented.Originality/valueWhile earlier research has addressed this problem in developed nations, this is the first study that fulfills the need to investigate the variables that influence MSMEs' cash holding decisions in a developing economy like India.

Determinants of corporate cash holdings: An application of a robust variable selection technique

US firm cash holdings have become increasingly concentrated over time withering shareholder returns and heightening agency problems associated with free cash flows. We investigate the determinants of corporate cash holdings using a robust regression technique (the Least Absolute Deviation Regression, LAD) and a state-of-the-art variable selection procedure (The Least Absolute Shrinkage and Selection Operator, LASSO). This framework identifies a sparse model which is also resistant to outliers. We obtain several results. First, the median absolute errors of the LAD-LASSOselected variables is significantly lower than the corresponding values of the basic determinants commonly used in the literature, in both in-sample and out-of-sample schemes. Second, financial leverage is a key determinant of cash holdings, indicating that cash and debt policies are tightly related (debt-cash substitutability). Third, none of the corporate governance proxies identified in the literature as a corporate cash holding determinant (managerial ownership, board independence, CEO duality, board size, and institutional ownership) is selected by the LAD-LASSO method, challenging the potency of governance mechanism in corporate cash management. Fourth, the financial crisis of 2008 dramatically changed the selected predictors for cash holdings as well as requiring additional predictors for the period, though their number was heavily curtailed after the period. Fifth, the money demand function is different between financially constrained and unconstrained firms, in both combination and number of influential variables. Finally, prediction error of the LAD-LASSO-based cash model is smaller than that of the principal components regression in both in-sample and out-ofsample prediction. Our findings are of importance to corporate cash managers, shareholders, monetary policy authorities, and scholars on the issues such as adjustment speed of cash holdings and valuation of excess cash reserves, which are based on the fitted values from the cash model.

Determinants of Corporate Cash Holdings in Hospitality Sector of United States of America: Using Two-Step System GMM

This study investigates the determinants of cash holding in the Hospitality sector in the USA for the period of 14 years from 2005-to 2018. The selection of 2005 as a base year was due to Thomson Reuter Data Stream registered with International Classification Benchmark (ICB). Determinants i.e. LVG, CF-V, and LQTY,have a positive impact, while SZE, CP-EXP, GR_OPP, CACF, A-INT, DDD, and SX have a negative impact on cash holding. Furthermore, model 2 shows a sub-sector where Restaurant and bar is taken as a reference year. Airlines companies retain excess for their operating activities while Hotel is found significant but prevail a negative coefficient. So, they may easily access to financial market easily. Unfortunately, other sub-sector, i-e, gambling, recreational activities, and tours and Travels, are found insignificant. The estimated sign prevails that there is no issue of auto correlation. While Ho of Hansen's test indicates that there is no issue of explanatory variable and error terms.

The determinants of corporate cash holdings: evidence from Shariah-compliant and non-Shariah-compliant corporations

PurposeThe purpose of this study is to investigate the difference between the determinants of cash holdings of Shariah-compliant and non-Shariah-compliant firms, for non-financial corporations in the Gulf Cooperation Council (GCC).Design/methodology/approachThe data include all non-financial firms listed in six GCC markets over a period 2005–2019. The IdealRatings database is used to identify Shariah-compliant firms in the GCC. To examine the determinants of cash holdings, a static model is used. To confirm the applicability of the method applied, the Breusch–Pagan Lagrange Multiplier (LM) and Hausman (1978) are used to choose the most efficient and consistent static panel regression.FindingsThe results show that, for Shariah-compliant firms, the relevant determinants of cash holdings are leverage, profitability, capital expenditure, net working capital and operating cash flow. For non-Shariah-compliant firms, the only relevant determinants of cash holdings are leverage, net working capital and operating cash flow. The findings suggest that the cash holding decisions of Shariah-compliant firms can be best explained using the pecking order theory. This reveals that Shariah-compliant firms use liquid assets as their first financing option, due to the Shariah regulations.Research limitations/implicationsFuture studies may investigate the optimal levels of cash holdings and compare the adjustment speeds toward target cash holdings of both the Shariah-compliant firms and their conventional counterparts.Originality/valueThis study is the first to investigate the difference between the determinants of cash holdings of Shariah-compliant and non-Shariah-compliant firms.

The impact of the global financial crisis on corporate cash holdings: Evidence from Eastern European countries

This study investigates the impact of the global financial crisis on the determinants of corporate cash holdings and adjustments towards target cash levels using a sample of Eastern European firms. Employing panel fixed effects and GMM estimations, the results reveal that firm-level determinants of cash holdings significantly differ for pre- and post-crisis periods. Moreover, we find significantly lower adjustment speed to attain the optimal cash level in the post-crisis period. Our results are robust to correction for endogeneity. These results hold important implications for Eastern European firms, which are significantly afflicted by the global financial crisis in terms of liquidity shortage and limited financial flexibility.

Do macroeconomic conditions affect corporate cash holdings and cash adjustment dynamics? Evidence from GCC countries

PurposeThis study aims to investigate the influence of macroeconomic conditions on corporate cash holdings in terms of their influence on the level of cash and the speed of adjustment of cash to target levels in the Gulf Cooperation Council countries (GCC).Design/methodology/approachThe study employs both static and dynamic regression analyses considering a sample of 2,878 firm-year observations drawn from stock markets in GCC countries over the 2010–2018 period.FindingsConsistent with the precautionary motive, the results show that GCC firms tend to accumulate cash reserves in weak economic periods. Evidence also reveals that the estimated adjustment coefficients from dynamic panel models show that GCC firms adjust more slowly toward their target cash ratio in periods of unfavorable economic conditions.Practical implicationsThis study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering financial constraints imposed by macroeconomic conditions. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of macroeconomic factors on firm's cash holding decision. Therefore, in an effort to increase the supply of external financing available to firms, policymakers may devise investment friendly environment by controlling macroeconomic factors.Originality/valueThis paper offers some insights on the macro determinants of cash holdings by investigating emerging economies. It explores the role of macroeconomic conditions on corporate cash holdings in terms of their influence on the costs of external funds and financial constraints.