Determinants of Excess and Deficit Cash Holdings of Firms: Evidence from Emerging Market

Abstract

Using a sample of Indian firms, we study the determinants of corporate cash holdings in an emerging economy. We study the excess and deficit cash holdings and assess the impact of leverage, accrual quality and working capital accruals on cash holdings. We find that after controlling for growth and size, leverage depends upon whether the firm holds excess or deficit cash. Levered firms with high profitability (measured via return on equity—ROE) hold less cash as compared to firms holding less than desired cash even if the profitability is high, and ample growth opportunities are available. We also find that while operating profit has no significant impact on cash holdings, volatility of sales does have a positive and significant impact. Firms having ready access to capital market (proxied by size and amount of leverage) are less likely to hold cash. Therefore, we argue that such firms can focus on value-generating activities without having to worry about liquidity. At the same time, smaller firms with good profitability (measured as return to equity) may also hold less cash as presented in this study.

The Moderating Effect of Firm Characteristics on the Association Between Accounting Conservatism and Cash Holdings

“… There is a significant and negative effect of firm size on CASH for all models. This result supports Nguyen (2006), Drobetz and Gruninger (2007) and Ogundipe et al (2012).However, this result is not consistent with Kariuki et al(2015), Hosono et al(2019) and Das and Goel (2019).…”

“…Guney et al (2007) prove this association for firms in the largest five countries around the world from 1996 to 2000. Kariuki et al, (2015) confirm that firm leverage has a positive effect on CASH in Kenya, Das and Goel (2019) find that firms with low leverage and profitability hold highs level of CASH. The researcher does not have studies that are interested in investigating the effect of firm leverage on the association between conservatism and CASH.…”

Factors influencing liquidity position of Indian manufacturing companies

“…The study suggested that leverage has a positive and significant influence on cash holdings and cash holdings have a negative and significant influence on firm's value. In the Indian context, few of the important research in the area of cash holdings inclu de Paskelian and Nguyen (2010), Gautam et al (2014), Cheung (2016), Maheshwari and Rao (2017) and Das and Goel (2019). A study on the cash holding patterns for family owned firms found an inverse relationship between cash and ownership (Paskelian and Nguyen, 2010).…”

“…The findings of the paper suggested a positive relationship between cash and market-to-book ratio and dividend pay-out, while a negative association with capital expenditure, leverage and research and development expenditure. In a recent study to analyse the determinants of both excess cash and deficit cash holding in the Indian context, it was observed that highly levered firms with positive profitability tend to hold less cash and firm size is a significant determinant of cash holdings (Das and Goel, 2019).…”

Exploring Financial Constraints as Moderator on Nexus Between Excess Cash Holding and Firm’s Performance

“…Past literature reveals that excess of cash holding is the most preferred factor for all companies. Excess of cash holding lead to firm performance however the underlying mechanism due to which excess of cash holding have positive or negative effect on firm performance are still not yet clear and nobody explain it (Das & Goel, 2019). Now a days, most of the firms facing different types of problems due to which their performance is going down day by day.…”