The corporate cash holdings: Determinants and implications

Several empirical studies have reported that the level of short-term financing is higher in firms operating in developing countries. Short-term financing increases risk of default as it matures quickly and leaves little room for the borrowing firm to manage its cash flows. But if the firm has a cash buffer, it can avoid such a risk. If firms in developing countries have higher level of short-term debts, do they carry larger cash balances too? Do firms in Pakistani match the maturity of assets with the maturity of their debts? In this study, we investigate these questions using a sample of 380 listed firms over a period of 1996 to 2008. The descriptive statistics show that cash-to-total assets ratio of the sampled firms is almost the same as reported in other empirical studies for developed countries such as US and UK. This finding raises an important question of how firms in Pakistan with more short-term financing carry relatively smaller balances of cash. As an answer, this study puts forward several explanations, which have important implications for capital market and firm financing. Results of panel data models indicate that cash-to-total assets ratio increases with growth opportunities, size of a firm, dividends ratio, and decreases with debt-maturity and conversion cycle. To allow for the possibility that cash-to-total assets ratio is adjusted gradually over time by firms in an attempt to reach optimal ratio, the study also employs a partial adjustment model by using the generalized methods of movements (GMM).