Financial Constraints and Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data

Rashid, Abdul; Ashfaq, Maryam

doi:10.1142/s2010495217500099

Cited by 6 publications

(11 citation statements)

References 63 publications

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“…The results are mixed as at the first place, FC firms have appeared to adjust more speedily then FUC firms and second, there is no evidence of higher rate of downward adjustment of cash holdings after controlling for financial constraints. The results are consistent with Rashid and Ashfaq (2017) who also found a positive association between corporate cash holdings and financial constraints. But for asymmetric adjustment of cash holdings across financial constraints, there is no evidence from prior literature which gives the same results.…”

Section: Discussionsupporting

confidence: 91%

“…According to our findings, FC firms move more quickly toward optimal level of cash holdings than FUC firms in case of deviation from the target level of cash. The results are consistent with Rashid and Ashfaq (2017) and Han and Qiu (2007) who also found a higher tendency of accumulating cash by FC firms than FUC firms. Higher levels of cash holdings in FC firms are associated with higher investment and hedging needs.…”

Section: Financial Constraints and Adjustment Speed Of Cash Holdingssupporting

confidence: 90%

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Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

Siddiqua

Rehman

Hussain

2019

JABES

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Purpose The purpose of this paper is to investigate the asymmetric adjustment of cash holdings in Pakistani firms for above and below target firms. Design/methodology/approach The study employs generalized method of moments (GMM) to investigate the adjustment of cash holdings. Findings The study found that the firms which hold cash above the optimal level of cash holdings have higher speed of adjustment than the firms which hold cash below the optimal level. Financially constrained (FC) firms also adjust their cash holdings faster than financially unconstrained (FUC) firms but high speed of downward adjustment does not remain persistent after financial constraints are controlled. Findings of this study reveal this asymmetric adjustment in above and below target firms and extend these results in FC and FUC Pakistani listed firms, respectively. Research limitations/implications The conclusion of this study has been derived under certain limitations. There is a vast space to extend this study in different dimensions. Firms operating in capital-intensive industries may provide different results for financial constraints because their policy designing would be quite different from other firms. Originality/value This study contributes to cash holdings research in Pakistan by exploring the adjustment behavior of cash holdings across Pakistani non-financial firms using econometric modeling. Downward adjustment rate is supposed to be higher than upward adjustment rate and this rate is tested using dynamic panel data model. Similarly, it is inferred that this relationship holds for above target firms even after including the financial constraints in the presented model.

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Section: Discussionsupporting

confidence: 91%

Section: Financial Constraints and Adjustment Speed Of Cash Holdingssupporting

confidence: 90%

Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

Siddiqua

Rehman

Hussain

2019

JABES

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“…In principle, a firm would be considered as financially constrained when the cost of its external financing exceeds the cost of internally generated funds (Chan et al , 2013). However, the scholars including Opler et al (1999), Almeida et al (2004), Chang et al (2007), Duchin (2010), Rashid and Ashfaq (2017) and many others are of the view that a firm would be considered as financially constrained if it lies in at least one of the following categories: (1) it is small, (2) it has higher growth prospects, (3) it is not profitable, (4) it has a relatively higher level of debt, (5) it does not pay dividends regularly, (6) it holds less amount of cash and cash equivalents and (7) it is relatively young. Nevertheless, in the empirical finance literature, the empiricists do not have any consensus on the use of any one measure.…”

Section: Methodsmentioning

confidence: 99%

“…In this paper, a firm is considered financially constrained if it does not pay dividend during an accounting year. Previously, Cleary (1999), Duchin et al (2010), Denis and Sibilkov (2010), Muuls (2015) and Rashid and Ashfaq (2017) have also utilized the payout ratio as a measure of financial constraints.…”

Section: Methodsmentioning

confidence: 99%

“…In recent years, several researchers have also examined the influence of exchange rate changes and its volatility on export performance by utilizing firm-level panel data sets. These studies include Greenaway et al (2010) for the United Kingdom, Cheung and Sengupta (2012) for India, Berman et al (2012) for France, Héricourt and Poncet (2015) for China, Li et al (2015) for China and Rashid and Waqar (2017) for Pakistan. One of the common findings of these studies is that the real exchange rate shocks have an inverse influence on exporting.…”

Section: Introductionmentioning

confidence: 99%

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The exports–exchange rate volatility nexus in Pakistan: do financial constraints and financial development matter?

Rashid

Muneeb²,

Karim³

2021

IJOEM

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PurposeThis paper first examines how changes in the real effective exchange rate and its volatility affect the exporting activities of firms. Next, it investigates whether exchange rate volatility (EXRV) affects the export behavior of financially constrained and unconstrained firms differently. Finally, it examines the role of financial development in mitigating the effects of EXRV and financial constraints on firms' exports.Design/methodology/approachThe empirical analysis of the paper is based on a wide panel of Pakistani nonfinancial firms listed at the Pakistan Stock Exchange during the period 2001–2016. To mitigate the problem of endogeneity and to take into account the dynamic nature of the empirical model, the authors apply the robust two-step system-GMM estimator developed by Blundell and Bond (1998). To examine the role of credit constraints, firm-year observations are sorted as financially constrained and unconstrained based on the median value of three alternative measures: the liquidity ratio, the dividend payout ratio and the Whited and Wu (WW) index.FindingsThe results reveal that an increase in the real effective exchange rate has a positive and significant impact on firms' exports. However, the results show that the EXRV is significantly and negatively related to exporting decisions, suggesting firms considerably decrease their exports during periods of increased unpredictable variations in exchange rates. The findings also suggest that compared to financially constrained firms, the adverse effect of EXRV on exports is weaker for financially unconstrained firms. This finding implies that firm-level financial constraints unfavorably impact exports by making exporting more sensitive to the EXRV. Finally, the findings indicate that financial development not only positively affects firms' exports but also plays a vital role in declining the adverse effects of EXRV on firm-level exports. Specifically, the results show that financial development decreases the negative impact of EXRV on exports for both financially constrained and unconstrained firms. However, the moderating role of financial sector development is higher for financially unconstrained firms.Research limitations/implicationsNotwithstanding that the authors present robust and strong empirical evidence of the effects of EXRV on exporting and on the role of both firm-level financial constraints and financial sector development in formulating these effects, there are some limitations of the study. The authors use a single proxy for measuring financial sector development. However, one may construct an index for the financial sector developed using principal component analysis (PCA) by considering different measures of financial development. The authors use three different measures of financial constraints. Nonetheless, more sophisticated techniques such as switching regression can be used to endogenously determine whether firms are financially constrained. Moreover, an examination of the asymmetric effects of EXRV on exporting across different industries would also be worthwhile.Practical implicationsFrom a policy point of view, the results suggest that the development of the financial sector and the strategies to lessen credit constraints faced by firms will help in mitigating the adverse effects of the EXRV on the exporting behavior of firms in Pakistan. The findings also suggest that managers in financially constrained firms should apply appropriate hedging strategies to hedge exchange rate risks. Finally, the findings suggest that investors should take into consideration exchange rate dynamics and firms' financial constraints while investing in exporting firms' stocks.Social implicationsSince the findings suggest that financially constrained firms' exports are more exposed to EXRV, managers of such exporting firms are suggested to apply effective and suitable currency risk-minimizing hedging instruments for enhancing their exports. The government should also implement economic and financial policies in such a way that they should help in reducing volatilities of exchange rates and in turn, encouraging firms to export more. Definitely, any policy, at both government and firm level, favoring exporting and export-oriented growth will not only help in overcoming the problem of a persistent and wide trade deficit but also help society by providing more employment and investment opportunities.Originality/valueRecently, Pakistan has experienced significant declines in foreign reserves, persistent political unrest and enlarged trade deficits. All these have increased the uncertainty about the exchange rate. Therefore, it is valuable to know the EXRV effects on firms' exporting activities. Second, Pakistani firms face more financial constraints, and thus, the influence of financial constraints in formulating the volatility effects on exporting would be worth exploring. Finally, no research has yet taken place to scrutinize the role of financial development in mitigating the adverse effects of EXRV and financial constraints on exporting activities. This paper provides firsthand empirical evidence on the role of financial constraints and financial sector development in formulating the EXRV impacts on firm-level exports in Pakistan.

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Financial condition, working capital policy and profitability: evidence from Indian companies

Dash

Sethi

Swain

2023

JIBR

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Purpose The purpose of this paper is to examine the impact of working capital management (WCM) on profitability under different financial conditions (constraint/unconstraint) and WCM policy (aggressive/conservative). Furthermore, the study investigates the existence of optimal working capital levels under different financial conditions and WCM policy. Design/methodology/approach Two-step system generalized method of moments and fixed effect models are used to analyze the data collected from Prowess database from 2011 to 2020 for a sample of 1,104 Indian manufacturing companies. Findings The study finds an inverted U-shaped relationship between working capital and profitability in all financial conditions and working capital policy. This finding advocates the existence of an optimal level of working capital that equates the costs and benefits of holding working capital to maximize the companies’ profitability. However, holding working capital beyond the optimal level negatively affects profitability. Companies under financial constraints with aggressive working capital policies have the lowest optimal cash conversion cycle (CCC). Furthermore, the relationship of working capital with profitability and the optimal CCC varies owing to firm age and industry group. Originality/value To the best of the authors’ knowledge, this is the first paper that incorporates the impact of working capital on firm’s performance from both financial constraint (unconstraint) and aggressive (conservative) working capital policy perspectives in the Indian context. Furthermore, this study also contributes in terms of reflecting the effect of firm age and industry in determining the optimum CCC of the firms.

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Financial Constraints and Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data

Cited by 6 publications

References 63 publications

Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

The exports–exchange rate volatility nexus in Pakistan: do financial constraints and financial development matter?

Financial condition, working capital policy and profitability: evidence from Indian companies

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