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

Abstract

Recent studies are interested in the determinants of cash holdings (CASH), some of these studies focus on conservatism, as one of these determinants. In light of a debate on the nature of the association between conservatism and CASH, this paper discusses and investigates the answers for three questions, the first question about the direct association between conservatism and CASH, the second question about the moderating effect of firm characteristics on this association, the third question about the effect of adopting Egyptian Accounting Standards (EAS) since 2016 on the last association. This paper focuses on Egyptian listed firms in Egyptian Stock Exchange (EGX), especially EGX 100, for six years period from 2013 to 2018 for 11 main sectors, 125 firms and 703 unbalances panel data observations. The findings indicate that (1) conservatism has a negative effect on CASH, (2) only firm size has a moderating and positive effect on the association between conservatism and CASH, (3) firm leverage, firm growth opportunity, and firm managerial ownership do not have a moderating effect on the last association. (4) Adopting EAS in 2016 by Egyptian listed firms gives the management of these firms' suitable chances to control CASH using its association with conservatism.

The Association between Accounting Conservatism and Cash Holding, Dividends and Leverage

“…So, managers would have few incentives to hold excess amounts of cash. This result is consistent with Soliman (2019) and in contrast with Lin et al (2018) and Hamad et al (2019). Regarding control variables, while Table 5 shows that firm size (SIZE) and net working capital (NWC) are positively and significantly influencing cash holding, dividends ratio (DR) is found to be negatively and significantly affecting cash holding.…”

“…Accounting conservatism (AC) is therefore calculated based on this index using the following formula: CFO =Cash flow from operating activities 𝑇𝐴 t-1 = Total assets at the beginning of the year Three models are used here to reflect the impact of accounting conservatism on cash holdings, dividend payment and leverage. In model one, cash holding (CASH) is measured by the ratio of cash and cash equivalent to total assets (Al-Hadi et al, 2020;Al-Amri et al, 2015;Soliman, 2019). In model two, cash dividends (DIVIDENDS) are measured by the ratio of dividends paid to shareholders to total assets (Al Lawati & Hussainey, 2021;Jiraporn et al, 2011).…”

تأثير الملكية المؤسسية على الاحتفاظ بالنقدية: دليل من مصر( باللغة الانجليزية)

“…Besides, cash is also important in making operational, investment and financial decisions. It enables the sustainability of operations and gives firms the necessary funds to make better investment decisions when they are financially distressed (Soliman, 2019;Al Amri et al, 2015). However, agency conflicts between managers and shareholders affect the decisions regarding the use of the firm's resources and can be the source of significant inefficiencies (Nguyen and Rahman, 2020;Harford et al, 2008).…”