The Determinants of Corporate Cash Holdings: Novel Evidence from Emerging Countries
Abstract
The aim of this study is to investigate the determinants of corporate cash holdings in emerging countries. The sample comprises non-financial firms from six emerging countries, five of them commonly referred to as BRICS, plus Turkey. The dataset includes the data of 4,769 firms and covers a ten-year period from 2012 to 2021, resulting in a total of 47,690 firm-year observations. We run panel regressions, specifically fixed and random effects models, and conduct the J.A. Hausman [1] test to choose between the latter. We use several firm-specific variables as independent variables and the GDP growth rate and the inflation rate as country-specific control variables. The results reveal that firm size, leverage, capital expenditures, net working capital, operating cash flow, dividend payments, firm age, and research and development (R&D) expenditures are significant determinants of corporate cash holdings, with some differences among countries and/or industries in terms of the sign and the significance levels. The macroeconomic variables showed significant results in some countries and industries, yet they were not consistent enough to make general conclusions. This study provides new empirical evidence on the determinants of corporate cash holdings by using a large dataset from major emerging countries. Our findings have important implications for corporate managers and policymakers in designing cash holding and liquidity policies. A comprehensive understanding of the main determinants of corporate cash holdings enables managers to adopt appropriate financing and investing strategies in the long term, as well as better short-term financial policies.
Downloads
References
Hausman J.A. Specification tests in econometrics. Econometrica. 1978;46(6):1251-1271. https://doi.org/10.2307/1913827 DOI: https://doi.org/10.2307/1913827
Al-Najjar B. The financial determinants of corporate cash holdings: evidence from some emerging markets. International Business Review. 2013;22(1):77-88. https://doi.org/10.1016/j.ibusrev.2012.02.004 DOI: https://doi.org/10.1016/j.ibusrev.2012.02.004
Chireka T., Fakoya M.B. The determinants of corporate cash holdings levels: evidence from selected South African retail firms. Investment Management and Financial Innovations. 2017;14(2):79-93. https://doi.org/10.21511/imfi.14(2).2017.08 DOI: https://doi.org/10.21511/imfi.14(2).2017.08
Ramirez A., Tadesse, S. Corporate cash holdings, uncertainty avoidance, and the multinationality of firms. International Business Review. 2009;18(4):387-403. https://doi.org/10.1016/j.ibusrev.2009.02.013 DOI: https://doi.org/10.1016/j.ibusrev.2009.02.013
Myers S.C. Determinants of corporate borrowing. Journal of Financial Economics. 1977;5(2):147-175. https://doi.org/10.1016/0304-405X(77)90015-0 DOI: https://doi.org/10.1016/0304-405X(77)90015-0
Opler T., Pinkowitz L., Stulz R., et al. The determinants and implications of corporate cash holdings. Journal of Financial Economics. 1999;52(1):3-46. https://doi.org/10.1016/S0304-405X(99)00003-3 DOI: https://doi.org/10.1016/S0304-405X(99)00003-3
Ferreira M.A., Vilela A.S. Why do firms hold cash? Evidence from EMU countries. European Financial Management. 2004;10(2):295-319. https://doi.org/10.1111/j.1354-7798.2004.00251.x DOI: https://doi.org/10.1111/j.1354-7798.2004.00251.x
Saddour K. The determinant and the value of cash holdings: Evidence from French firms. 2006. https://www.finance.dauphine.fr/wp-content/uploads/2015/07/cereg200606.pdf (accessed on 13.10.2023)
Guizani M. The financial determinants of corporate cash holdings in an oil-rich country: evidence from Kingdom of Saudi Arabia. Borsa Istanbul Review. 2017;17(3):133-143. https://doi.org/10.1016/j.bir.2017.05.003 DOI: https://doi.org/10.1016/j.bir.2017.05.003
Myers S.C., Majluf N.S. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics. 1984;13(2):187-221. https://doi.org/10.1016/0304-405X(84)90023-0 DOI: https://doi.org/10.1016/0304-405X(84)90023-0
Jensen M.C. Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review. 1986;76(2):323-329.
Orens R., Reheul A.M. Do CEO demographics explain cash holdings in SMEs? European Management Journal. 2013;31(6):549-563. https://doi.org/10.1016/j.emj.2013.01.003 DOI: https://doi.org/10.1016/j.emj.2013.01.003
Bugshan A., Alnori F., Bakry W. Shariah compliance and corporate cash holdings. Research in International Business and Finance. 2021;56:101383. https://doi.org/10.1016/j.ribaf.2021.101383 DOI: https://doi.org/10.1016/j.ribaf.2021.101383
Ozkan A., Ozkan N. Corporate cash holdings: an empirical investigation of UK companies. Journal of Banking and Finance. 2004;28(9):2103-2134. https://doi.org/10.1016/j.jbankfin.2003.08.003 DOI: https://doi.org/10.1016/j.jbankfin.2003.08.003
Al-Najjar B. The interrelationship between capital structure and dividend policy: Empirical evidence from Jordanian data. International Review of Applied Economics. 2011;25(2):209-224. https://doi.org/10.1080/02692171.2010.483464 DOI: https://doi.org/10.1080/02692171.2010.483464
Choi P.M.S., Choi J.H. Why do firms hold cash? Evidence from Korean stock listings. Investment Management and Financial Innovations. 2016;13(3):311-321. https://doi.org/10.21511/imfi.13(3-2).2016.03 DOI: https://doi.org/10.21511/imfi.13(3-2).2016.03
Marwick A., Hasan M.M., Luo T. Organization capital and corporate cash holdings. International Review of Financial Analysis. 2020;68:101458. https://doi.org/10.1016/j.irfa.2020.101458 DOI: https://doi.org/10.1016/j.irfa.2020.101458
Al-Najjar B., Clarck E. Corporate governance and cash holdings in MENA: Evidence from internal and external governance practices. Research in International Business and Finance. 2017;39(A):1-12. https://doi.org/10.1016/j.ribaf.2016.07.030 DOI: https://doi.org/10.1016/j.ribaf.2016.07.030
Yang X., Han L., Li W., et al. Monetary policy, cash holding and corporate investment: evidence from China. China Economic Review. 2017;46:110-122. https://doi.org/10.1016/j.chieco.2017.09.001 DOI: https://doi.org/10.1016/j.chieco.2017.09.001
Dittmar A., Mahrt-Smith, J. Corporate governance and the value of cash holdings. Journal of Financial Economics. 2007;83(3):599-634. https://doi.org/10.1016/j.jfineco.2005.12.006 DOI: https://doi.org/10.1016/j.jfineco.2005.12.006
Bates T.W., Kahle K.M., Stulz R.M. Why do US firms hold so much more cash than they used to? The Journal of Finance. 2009;64(5):1985-2021. https://doi.org/10.1111/j.1540-6261.2009.01492.x DOI: https://doi.org/10.1111/j.1540-6261.2009.01492.x
Lozano M.B., Yaman S. The European financial crisis and firms’ cash holding policy: an analysis of the precautionary motive. Global Policy. 2020;11:84-94. https://doi.org/10.1111/1758-5899.12768 DOI: https://doi.org/10.1111/1758-5899.12768
Ramezani C.A. Financial constraints, real options and corporate cash holdings. Managerial Finance. 2011;37(12):1137-1160. https://doi.org/10.1108/03074351111175074 DOI: https://doi.org/10.1108/03074351111175074
Chen H., Yang D., Zhang J.H., et al. Internal controls, risk management, and cash holdings. Journal of Corporate Finance. 2020;64:101695. https://doi.org/10.1016/j.jcorpfin.2020.101695 DOI: https://doi.org/10.1016/j.jcorpfin.2020.101695
Bigelli M., Sanchez-Vidal J. Cash holdings in private firms. Journal of Banking and Finance. 2012;36(1):26-35. https://doi.org/10.1016/j.jbankfin.2011.06.004 DOI: https://doi.org/10.1016/j.jbankfin.2011.06.004
Al-Najjar B., Belghitar Y. Corporate cash holdings and dividend payments: evidence from simultaneous analysis. Managerial and Decision Economics. 2011;32(4):231-241. https://doi.org/10.1002/mde.1529 DOI: https://doi.org/10.1002/mde.1529
D’Mello R., Krishnaswami S., Larkin P.J. Determinants of corporate cash holdings: Evidence from spin-offs. Journal of Banking & Finance. 2008;32(7):1209–1220. https://doi.org/10.1016/j.jbankfin.2007.10.005 DOI: https://doi.org/10.1016/j.jbankfin.2007.10.005
Hall T., Mateus C., Mateus I. What determines cash holdings at privately held and publicly traded firms? Evidence from 20 emerging markets. International Review of Financial Analysis. 2014;33:104-116. https://doi.org/10.1016/j.irfa.2013.11.002 DOI: https://doi.org/10.1016/j.irfa.2013.11.002
Copyright (c) 2024 Journal of Corporate Finance Research | ISSN: 2073-0438
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
