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CASH HOLDING AND COMPANY PERFORMANCE 2
Table of Contents
Background ................................................................................................................................. 4
Definition of Terms..................................................................................................................... 7
Introduction ................................................................................................................................. 8
Hypothesis 1.......................................................................................................................... 19
Hypothesis 2.......................................................................................................................... 19
Hypothesis 3.......................................................................................................................... 19
Research Design........................................................................................................................ 19
Introduction ............................................................................................................................... 33
Conclusion ................................................................................................................................ 36
References ..................................................................................................................................... 36
CASH HOLDING AND COMPANY PERFORMANCE 4
Chapter 1: Introduction
Background
Corporate cash holdings, savings or reserves has in the past two decades gained extensive
interest from academic scholars (Amess, Banerji & Lampousis, 2015). It has become an
important concept in financial management and has shown an upward trend in many developed
economies (Horioka & TeradaHagiwara, 2014). Cash holdings is referred to as cash in hand that
liquid assets /cash equivalents that can easily be converted into cash (Gill & Shah, 2012).
Companies have considerably increased their cash holdings globally in the past two decades.
According to reports by Bates, Kahle and Stulz (2009) corporate cash holdings globally has
increased by 0.46% per annum between the periods of 190-2006. For instance, Forbes estimates
that the firms in the US only hold cash of approximately $5 trillion. Also in other countries such
as japan, companies are estimated to hold $2.1 trillion in cash which amounts to 44% of the
countrys GDP. Additionally according to Chen, Chen, Schipper, Xu and Xue (2012) Chinese
firm hold more than 20% of their total assets in cash (Ferreira &Vella, 200).
The statistics indicated above show that cash holding is significant and important to
corporate firms worldwide. Corporate cash holdings are considered as the firms most liquid
asset (Davis & Charemza, 2012) and indicates a significant fraction of all corporate wealth
tend to build up their cash holdings to protect themselves from the scrutiny of the financial
markets. Moreover, companies can utilize corporate cash holdings for investments when external
financing from external financial institutions and investors is expensive (Opler, Pinkowitz,
Stulz& Williamson, 2001). When companies utilize corporate cash holdings properly through
CASH HOLDING AND COMPANY PERFORMANCE 5
profitable and beneficial investment projects, the firm performance improves. Additionally,
corporate cash holdings allows firms to be borrowing constrained and save more from company
investments that generate more cash (Horioka & TeradaHagiwara, 2014). Generating large
amounts of cash increases the level of corporate cash holdings. Companies with large amounts of
cash holdings are considered to have a higher payout to their shareholders through dividends as
well as stock repurchases. Such firms mostly generate their cash internally through investments
and their acquisitions are higher than for those companies with lower amounts of cash holdings
(Opler, Pinkowitz, Stulz & Williamson, 2001). Companies that maximize value will attempt to
hold all liquid assets in such a way that the marginal cost is equal to the marginal benefits.
Corporate cash holdings have a positive effect on the firm performance. Corporate
companies make decisions to accumulate cash reserved as a tool that enables them to improve
their business performance by supporting processes that lead to business development. The
decision of holding cash is directed to the objective of maintaining greater levels of financial
flexibility that enables the firms to obtain investments and growth opportunities that directly lead
to the company performance (La Rocca & Cambrea, 2016). Large reserves of cash are an
important financial tool of financial flexibility, competitive advantage and firm performance.
Problem Statement
and its consequences for firms behavior (Amess, Banerji &Lampousis, 2015). Other kinds of
holdings that include precautionary motive, agency motive as well as transactional cost motive.
However little has been done to investigating the impact of cash holdings on the firm
analysis have majorly focused their attention on household or personal holdings as well as
TeradaHagiwara, 2014). This has resulted to the lack of adequate recent research focusing on
corporate cash holdings and its implications. From the literature stand point, it is unclear whether
corporate cash holdings have any effect on the performance of corporate firms. Hence, the
current study mainly focused on exploring corporate cash holdings and further examined its
Research Purpose
The main purpose of the research study was to examine the link that exists between cash
holdings and the company performance. The study further examined the relationship between
corporate cash holding and the company performance. The study also aimed to synthesis the
literature and offer insight to the primary motive of companies holding cash and how it
influences the firm performance. The study investigated data obtained from different to
understand how the level of corporate cash holdings aids the firms to grow and maintain positive
firm performance.
cash holdings as well as company performance in the field of financial management. The study
contributes to knowledge on cash holdings and provides information on how organizations can
well utilize their cash holdings to maintain and improve the company performance. The paper
clearly demonstrates how corporate cash holdings as liquid firm assets affect the company
performance. Practitioners in the field of financial management can refer to this information to
make informed decisions. The study also provides information on important factors that
CASH HOLDING AND COMPANY PERFORMANCE 7
practitioners can use to model the amount of cash that corporate hold. In addition, the study also
highlights the general motives that organizations consider to hold cash such as transaction cost,
precautionary and agency motives and how each motive benefits the organization. Companies
Definition of Terms
Corporate cash holdings - Refers to the sum of a companys cash and its marketable
securities.
Liquid asset refers to cash on hand or assets/holdings that can be readily be transformed
Introduction
The literature review section provides a summary and overview of previous research on
the subject matter of the study.The review of literature written by different scholars is an
important area in thesis development. Literature review is essential to the study as it a tool that
situates a study in a specific research community and tradition delineating the research gaps
found in literature that the study is expected fill as well as provide a rational for carrying out the
study study (Christopher, Khoo, & Jaidka 2011). This chapter reviews the literature of studies
done by scholars on cash holdings, determinants of cash holdings and the influence of cash
holding on company performance that is related to the purpose of the current research study. The
chapter also describes the theoretical framework of the study and provides a conceptual
framework that guides the empirical investigation in the study. The reviewed articles in the
chapter were sourced from EBSCohost, ProQuest, Academia Edu and Google Scholar. The
Theoretical Framework
The theoretical framework provides support for the use of theories in the research study.
Theories are propounded to understand and explain phenomena. Their use extends and
challenges knowledge within bounded assumptions(Green 2014). Different theories have been
developed in literature to explain the concept of corporate cash holdings and the value it brings
to the firm, the managers and the shareholders involved. The theories includethetrade-off theory,
the cash flow theory, financing hierarchy theory and the agency theory.
The agency cost theory mainly focuses on the different views that exist between company
managers and shareholders of the cost and value of cash holdings as liquid assets(Opler,
CASH HOLDING AND COMPANY PERFORMANCE 9
Pinkowitz, Stulz& Williamson, 2001). The theory indicates that managers are most likely to have
a greater preference for cash as it gives more discretion in making their investments and
spending decisions as well as the fact that it reduces the risk associated to costly financial
shareholders perceive that such preference that managers have for cash can lead them to placing
too much importance on the precautionary motive of cash holdings. According to the theory, the
shareholders also tend to perceive that managers with preference for cash may give less attention
to overinvestment and cash flow problems which mostly develop with companies with large
amounts of cash holdings (Opler, Pinkowitz, Stulz& Williamson, 2001). Based on the theory,
companies that wish to maximize their value should seek an optimal level of cash holding that is
able to balance the costs against the benefits of holding more cash.
The current research study will be framed and founded on the trade-off theory.The trade-
off theory is used to guide the study as it is a suitable theory for explaining cash holdings in
financially constrained companies (Bolton, Chen & Wang, 2013). The theory is based on the
optimal capital structure of the firm.According to the theory, the cost of external financing
generates a precautionary demand for cash as well as an optimal retained earning policy for the
firm. The corporate financial decisions and performance are not only shaped by the tax-induced
tradeoffs but they are also shaped by cash holdings and external-financing cost
considerations(Bolton, Chen & Wang, 2013). Bolton, Chen & Wang (2013) indicate that there is
the need of understanding the capital structure, firm performance and value under the
tradeoff theory of capital structure is generally based on the idea that firms decide between
funding their investments and operations through debt or cash holdings by balancing between the
CASH HOLDING AND COMPANY PERFORMANCE 10
cost and benefits of cash holding or external financing (Ramadan, 2015).The theory deals with
two concepts; the cost of holding cash and the benefit gained from holding cash for maintaining
an optimal amount of cash (Dittmar, Mahrt-Smith & Servaes, 2003; Opler, Pinkowitz, Stulz &
Williamson, 1999). Ferreira and Vilela (2004) argue that the trade-off theory as a framework
shows how firms identify the optimal level of cash holdings by measuring the marginal costs and
marginal benefits of holding cash. The authors argue that the cost of holding cash is the
opportunity cost of the capital that is invested in the liquid assets of the company; the cost which
the company foregoes when accumulating cash. Under the trade-off theory if the marginal
benefit is higher or equal to the marginal cost, the firm tends to maintain its performance, gain
value and perform positively (Dittmar, Mahrt-Smith & Servaes, 2003; Ferreira & Vilela, 2004;
According to a study conducted by Amess, Banerji and Lampousis (2015) the main
motives that corporate organizations have to hold cash is precautionary and agency motives.
Opler, Pinkowitz, Stulz and Williamson (1999) and Opler, Pinkowitz, Stulz and Williamson
(2001) also indicate that companies hold cash for transactional cost benefit as well as
precautionarybenefit. The authors indicate that companies try to avoid transactional costs that are
associated with raising funds activities and liquidating assets. The companies also hold cash to
avoid transactional costs of sourcing funds from external financing. Companies also hold cash to
prevent a situation where they need the funds for investments but the cash is not readily
available. By holding cash they take precaution for their future investments (Opler, Pinkowitz,
Stulz& Williamson, 2001).Ferreira and Vilela (2004) indicate that companies hold cash to reduce
the likelihood of financial distress, minimizing the cost of gaining external funds or liquidating
CASH HOLDING AND COMPANY PERFORMANCE 11
the existing company assets and to allow the company to pursue investment policies when
financial constraints are met. Harford (1999) indicates that those companies with high cash
holdings are more likely to attempt acquisitions than those companies with lower cash holdings.
This indicates acquisition activities as one of the factors that motivates company to hold large
amounts of cash.
Yan, Yi-Tsung and Chi-Wing (2015) indicate that the motives that firms have for holding
cash is; transactional, precaution and speculation. The authors highlight the cost of holding cash
as being forgone earnings and tax disadvantage. The authors indicate that firm hold cash instead
of allocating it to shareholders due to future investment opportunities. Yan, Yi-Tsung and Chi-
Wing (2015) provide empirica evidence that firms hold cash for speculative purposes by finding
a positive significant relationship between corporate cash holdings and the chance of a firm to
According to Bates, Kahle and Stulz (2009), the primary motives of companies holding
cash is agency motive, tax motive, transaction motive and precautionary motive. The authors
indicate that most firms hold cash due to precautionary motive which explains the increase in
cash ratios in the US firms. The authors also indicate that agency motive does not play a
significant role in corporate cash holdings activities.Dittmar, Mahrt-Smith and Servaes (2003)
argue that the reason why agency motive is considered insignificant is because the current
evidence from literature is weak and mainly focuses on US firms where shareholders enjoy good
protection.
Tax motives are associated to the high taxes that companies have to pay. Majority of
companies dont have cash at the time of tax payment hence the need of cash holdings (Anjum &
Malik, 2013). The agency motive is linked to the fact that skilled managers tend to hold cash
CASH HOLDING AND COMPANY PERFORMANCE 12
rather than give it to the shareholders when they have poor investment opportunities and need the
cash to smoothly run and maintain the operations of the firm (Anjum & Malik, 2013).
2011;Bates, Kahle & Stulz, 2009;Dittmar, Mahrt-Smith, Servaes, 2003; Ferreira& Vilela, 2004;
Najjar & Clark, 2016; Opler, Pinkowitz, Stulz& Williamson, 2000). The authors examined the
Dittmar, Mahrt-Smith and Servaes (2003) argue that agency problems is an important
determinant of corporate cash holdings. The authors indicate that companies in those countries
where shareholders write are not well protected have twice as much cash holdings compared to
those companies in countries where shareholders rights are well protected. Poor shareholder
protections lead to factors that results to the need of cash such as asymmetric information and
investment opportunities to be less important (Dittmar, Mahrt-Smith & Servaes, 2003). The
authors also argue that corporate governance is a critical determinant of corporate cash holdings
and that firms hold more cash when debt markets are more developed.
The most important determinants are considered to include the size, risk and the extent
of the companys investment opportunities (Opler, Pinkowitz, Stulz& Williamson, 2001). Also
according to Opler, Pinkowitz, Stulz & Williamson (1999) firms hold more cash when they
lower working capital and higher as well as more volatile cash flows. Smaller companies that are
riskier have large amounts of cash holdings. This argument is also supported by Dittmar, Mahrt-
Smith & Servaes (2003) who indicate that large firms hold less cash while those firms that are
profitable and perform highly have more cash holdings. In addition, smaller and high-growth
CASH HOLDING AND COMPANY PERFORMANCE 13
firms also tend to have large amounts of cash holdings. According to Opler, Pinkowitz, Stulz and
Williamson (2001) the size, risk and the extent of investment opportunities can be used to predict
the level of corporate cash holdings given the characteristics of the companies.
cash holdings. The authors argue that firms that with to undertake valuable investment
opportunities must issue common stock to raise cash. This indicates that valuable investment
opportunities leads firms to gain the need of holding cash. The authors indicate that large cash
holdings enables companies to undertake positive and profitable investments that increases the
value of the firm.They further indicate that firms that need financings tend to rely on their
internal sources of funds and also prefer debts to equity when they have less cash holdings and
require cash from external sources (Myers & Majluf 1984). According to Harford (1999)
indicates that companies hold cash to reduce the underinvestment problems. Holding cash
maintains the internal flexibility in corporate companies allowing the managers to reduce the
According to Ferreiraand Vilela(2004), the highly leveraged companies face higher costs
when investing in liquid assets. Thus, they hold less cash. In the emerging markets, Ferreira 2004
states thatbankruptcy associated costs are also important in determining cash holdings. Based on
the pecking order theory, cash holding decreases with leverage. This is because, if internally
generated funds are not sufficient, the companies will use its cash reserves before they issue their
debts. However, if the firm has an internal surplus, it would pay its debts. According to Ferreira
2004, the free cash flow argument implies that payouts in the form of interests reduce the
resources as well as the capital markets. Nonetheless, the lower leverage companies are less
likely to be monitored. That allows a superior managerial discretion. Growing number of studies
CASH HOLDING AND COMPANY PERFORMANCE 14
have found out that the level of financial leverage negatively affects corporate cash holding
(Ferreira et al, 2004). A good example is Saudi Arabia which is governed using the Islamic Law
that prohibits interest rates. Thus, the example shows that there is a negative relationship
Al-Najjar and Belghitar (2011) states that, according to the theory of trade off, the
relationship that exists between dividend payments and cash is negative. Firms that pay a
dividend can trade off the cost of holding money by eliminating their dividend payments.
Previous studies that includeOpler, Pinkowitz, Stulz and Williamson (1999) argue that
companies that pay their dividends can raise funds at low cost by reducing their dividend
payments. Thus, those companies dont need to hold high amounts of cash. On the contrary,
companies that dont pay dividends use the capital markets to raise funds. Likewise, Al-Najjar
and Belghitar, (2011) illustrates that the costs could be avoided for the firms that facesmall
internal financing. That can be done by issuing equity or reducing the amounts of paid dividends.
Al-Najjar and Belghitar, (2011) derives an example from Saudi Arabia. According to them, in
Saudi, there are no taxes on dividends and capital gains. As per Al-Najjar and Belghitar, (2011),
Saudi pays Islamic tax that represents about 2.5 percent of the firms remaining assets. In
summary, Al-Najjar and Belghitar, (2011) argue that Zakat is seen as a penalty for the unused
assets. Thus, the firm is requested to distribute generated income. Al-Najjar and Belghitar,
(2011) concludes by revisiting empirical findings and trade off the theory that shows a negative
Based on the pecking order theory, companies that have higher financial results retain a
greater level of liquidity. It is because profitable firms accumulate cash flow that is
mostlygeneratedinternally. Al-Najjar and Clark (2016) argues that profitable firms have more
CASH HOLDING AND COMPANY PERFORMANCE 15
assets in term of cash. Therefore, there is a positive link between a companys profitability and
cash holdings.
opportunities and cash holdings. Opportunity cost due to lack of liquidity is said to be severe for
companies with high-end investment projects. Al-Najjarand Belghitar (2011) states that financial
distress costs of bigger companies are higher than others. It makes external financing more
expensive. To avoid the costs, Al-NajjarandBelghitar (2011) advises the companies to provide
liquidity not to risk underinvestment in future. The pecking order theory states that there is a
As argued by Al-Najjar and Belghitar (2011) larger firms have more stability for cash
flows and have a lower probability of in financial distress. Bates, Kahle and Stulz
(2009)illustrate that bigger companies are likely to be able to liquidate a part of their non-core
assets. Bates, Kahle and Stulz (2009)conclude by stating that the size of the firmaffects cash
holdings. Other variables that are likely to influence corporate decisions to hold cash are the
transitional costs of raising outside funds, the cost of raising funds through asset sales,
renegotiations and dividends cuts, cost of hedging instruments, agency cost of debt, agency cost
conversion cycle, taxes, liquidity premium and cash flow uncertainty (Opler, Pinkowitz, Stulz&
Williamson, 2001).
Over the past few years, the relationship that exists between cash holding and firm
performance has shown great interest to academics and the financial community. According to
the economist January 2013, US corporations are holding the highest amounts of cash. There
CASH HOLDING AND COMPANY PERFORMANCE 16
were growths of about 10 percent in cash holdings from 1995-2010. Bates, Kahle and Stulz
(2009)refer to data published in the wall street journal which detected about $643 billion
regarding holding cash at major United States companies. Likewise, other studies as referred by
Bates, Kahle and Stulz (2009)shows more companies in the US are holding cash which is
associated to the high level of economic performance of most companies and the country in
general. There are advantages and disadvantages associated with cash holding. However, it is
hard to determine the predominant forces. Altogether, holding cash could be designed to support
the process of value creation for companies thus increase in company performance (Bates, Kahle
& Stulz, 2009; Harford, 1999). Large amounts of cash could be derived from the interest of
managers. Similarly, the adverse effects on performances could be justified in the view of the
null profitability of the liquid resources. La Porta (2002) speaks of empirical evidence that
associated cash is holding with positive effects. Even so, the relationship between cash holding
and performances is dependent. The value of cash holding depends on several factors that
include internal and external. The prevailing literature illustrates that firm performance, and cash
holding goes hand in hand. La Porta (2002) affirms that companies with higher cash holdings
tend to perform better. Contrariwise, according to La Porta (2002) companies with lower cash
According to Pinkowitz, Stulz and Williamson (2006) the empirical results demonstrate
that the holding of cash could lead to an increase in firms performances. Cash holding
determines the value of companies. The value of cash stocks increases in the presence of
financial problems. The holding of cash refutes the benefits of cash holding and causes a
reduction in performances. Pinkowitz, Stulz and Williamson (2006) illustrates that firms hold
cash to avoid transaction costs. On the other hand, holding large cash reserves enable companies
CASH HOLDING AND COMPANY PERFORMANCE 17
to seize growth opportunities and perform better. The opportunities would enable the firms to
handle unforeseen contingencies (Pinkowitz, Stulz and Williamson, 2006). It has been revealed
that managers want to hold large amounts of cash for opportunistic reasons. Saddour (2006) also
states that the holding cash has numerous benefits for companies that all lead to improved
performance.
According to Saddour (2006), the benefits relate to liquidity accumulation that comes
with positive effects on performances. Saddour (2006) suggests that the effects of holding cash
may affect the firms performance. For example, problems associated with financial limitations
could amplify the benefits of cash holding. It could lead to positive effects on performance.
Saddour (2006) also warns that ineffective governance could affect the liquidity and have
adverse consequences on returns. Companies that have higher levels of debt risk instability and
faces imminent failure. They also face substantial cash reserves with the aims of safeguarding
their survival. For this reason, Saddour (2006) states that the debt could amplify the benefits
linked with cash holding in terms of financial viability. Saddour 2006 concludes that cash
holding has a positive contribution to the value of the company. The following section discusses
the methodology that was employed in the research study for data collection and analysis of the
data obtained.
CASH HOLDING AND COMPANY PERFORMANCE 18
Chapter 3: Methodology
Study Purpose
The study mainly focused onexamining the link that exists between corporate cash
holdings and the company performance. The study further explored the relationship between
corporate cash holding and the company performance. The study aimed to investigate the
different firmperformance between corporate companies with high levels of cash holdings and
those with low levels of cash holdings. The study will add to existing literature by examining
corporate cash holdings in non-financial companies belonging to all sectors of North America
listed and non listed companies.To answer the research question the study will obtain financial
statements records of the firms and use the returns on equity (ROE) of the firms as a measure of
Al-Swidi & Fadzil, 2014).The following section presents the research questions.
Research Questions
The study had three research questions which addressed the effect of corporate
companies holding cash on the company performance.To achieve the studys purpose and guide
the research design, data collection and analysis the following research questions were
addressed:
1. Is there a relationship between corporate cash holding and the firm performance?
3. Is there a difference between the performances of companies with high levels of cash
The researcher integrated all available information yielded to provide holistic results
regarding the subject matter. The following section will address the research design employed
and present a detailed description of all the methods used to address these research questions.
Research Hypotheses
Based on the research question of the study the following hypotheses were validated in
the research.
Hypothesis 1
Ho: There is no relationship between corporate cash holdings and the firm performance.
H1: There is a relationship between corporate cash holdings and the firm performance.
Hypothesis 2
Ho: There is nosignificant difference between the performances of companies with high
levels of cash holdings compared to companies with low levels of cash holdings.
H1: There is a significant difference between the performances of companies with high
levels of cash holdings compared to companies with low levels of cash holdings.
Hypothesis 3
Ho: Corporate cash holdings does not significantly affect the company performance.
Research Design
The nature of the current research study was quantitative. The research therefore
employed a quantitative research design to address the research questions and validate
theresearch hypothesis stated in the study. Thequantitative research design allows an objective
exploration of the subject matter under consideration through statistical validation of research
data (Creswell,2014). The quantitative research design is characterised by the use of numeric
CASH HOLDING AND COMPANY PERFORMANCE 20
data as a measure of variables under study. The use of numeric data under the quantitative
provides the platform for application of statistical-based evidence. This enabled the researcher to
establish a link and relate the independent variables considered to the dependent variable.
Moreover, the design enables the researcher to establish an association between the study
variables (Ingham-Broomfield, 2014). The quantitative design also allows easy computation of
new variables from already existing variables. The design enabled the researcher to compute the
study variables cash holdings and firm performance measures. The quantitative design is a
suitable design for research studies that provide inference on the general characteristics of a
wider population based on a sample of the population. Therefore, the quantitative research
design was appropriate for the current study on the effect of company holding cash on the
Target Population
The target population of study is non-financial listed and unlisted companies in North
America. The panel data obtained in the current research study consisted of 11775 active
companies with 69002 observations.Only active companies were considered in the target
population. Inactive firms were removed as they had temporarily suspended their operation
within the period of study.The companies were from different industries in the region. Data
obtained consisted of financial statement information of the companies from 2010- 2017.
The sample obtained from the panel data of target population retrieved included
ofcompanies from all sectors. Most of the companies were excluded to large amounts of missing
observations on the variables considered in the study. Moreover, companies which indicated 0
value on each of the measurement variables such as cash, net income, total assets etc were
CASH HOLDING AND COMPANY PERFORMANCE 21
removed. Further, companies with cash and net income less than 100,000$ yearly were removed.
The last case observation which presented the last fiscal year of each company observations was
selected as the primary case. All other cases (duplicate cases/observation) per companywere
removed. The selected sample in the study well represented the entire population considered.
Data collected in the current research study was secondary data which was obtained from
Compstat North America Database for the period 2010-2017. The secondary data consisted of
variables of financial statements analysis of the non-financial companies. The data collected
represent both listed and non-listed companies in North America. The process of obtaining the
research data included login into Compstat North American Database through theWharton
research data service website. On the website the researcher selected the variables of interest
which included Net Income, Cash, Cash and Short-Term Investments, Total Assets, and Total
Liabilities among other company identify variables and codes. After the selection of the variables
the data was retrieved in sav format which is compatible with the Statistical Package of Social
Sciences (SPSS) software. The data was then cleaned and a sample of the firms was obtained
from the data set for analysis purposes. Summary of the data requested is presented in the
Data Analysis
The secondary quantitative sample data obtained through the Compstat North America
Database was analyzed using SPSS software. The analysis included computing new variables
such as cash holdings and company performance using the obtained variables in the data
set.Descriptive analysis was performed to obtain descriptive statistics of the variables considered
in the current research study. The analysis enabled the researcher to describe the data obtained
CASH HOLDING AND COMPANY PERFORMANCE 22
correlation analysis, analysis of means and regression analysis. Correlation analysis was
conducted to examine the relationship between cash holding and firm performance among the
other variables in the data set. The regression analysis was used to examine the causal
relationship between corporate cash holding and firm performance and provide a model of the
two variables.The following section describes the operationalization of the study variables.
2013). The dependent variable of the study was company performance while corporate cash
holdings represented the dependent variable of the study. The study variables were
operationalized as follows:
1. The variable cash holdings was computed by dividing the sum of cash by the net assets of
the companies. Other variables such as cash and shorter investment were considered in
the calculation of cash holdings as they are liquid assets. The cash holdings variable
2. The variable return on equity (ROE) which measures the firm performance of the
companies was computed by dividing the net income of the companies with the
Descriptive Statistics
Descriptive statistics was applied to the collected data to obtain the descriptive properties
of the data. The results of the descriptive analysis are presented in table 1 below.
Table 1
The table 1 presented above provides information regarding the minimum value,
maximum value, mean, standard deviation, skewness and kurtosis of the different variables used
in the study. The statistics indicate that the data is positively skewed for all variables including
cash holding and company performance variable return on equity. This indicates that most of the
companies considered in the sample will be having lower than the mean values for all the
CASH HOLDING AND COMPANY PERFORMANCE 24
positively skewed variables. For this kind of data, the mean values are a better indicator of
average statistics.
If the variables were negatively skewed most of the companies will be having higher than
the mean values and thus the median would be a better indicator of average statistics. Based on
the result most of the variables have high standard deviation which indicates the tendency of the
data to lie far from the mean values of the variables. The dependent variable of the study,
company performance (ROE), had a mean of 0.38 and a standard deviation of 5.56 while the
independent variable, cash holdings, had a mean of 1.06 and a standard deviation of 6.60.
Companies with cash holdings (Cash ratio) > 1 were categorized as having large cash
holdings levels while those < 1 were categorized as having low cash holding levels. Figure 1
below represents the percentage descriptive of the distribution of companies. The figure indicates
that 29.5% of the 679 companies represented companies with large cash holdings while 70.5% of
Figure 1
CASH HOLDING AND COMPANY PERFORMANCE 25
To achieve the study objectives stated, the researcher assessed the validity of the
hypotheses developed using inferential statistics. Based on the validation of the hypotheses the
researcher was able to answer the research questions and fulfil the objective of the study.The
appropriate statistical tests were used to test the validity of the hypotheses in consideration of the
test assumptions.
The assumption of normality was first tested before proceeding with the inferential tests
of the study hypotheses. In normality test, researchers tests the null hypothesis that the data is
CASH HOLDING AND COMPANY PERFORMANCE 26
normally distributed. Shapiro-Wilk test was used to assess the assumption on normality. The
Table 2
Shapiro-Wilk
Statistic Df Sig.
*p < .05
while cash holdings had a statistically insignificant p-value (p=0.081).The Shapiro-Wilk p-values
of all the study variables are statistically insignificant (p> 0.5). Hence, the null hypothesis is not
rejected and it is concluded that all the study variables are normally distributed.
Based on these results, the researcher can apply parametric statistical test such as Pearson
correlation and t-statistic instead of the non-parametric correlation test such as Spearman rank
Correlation Analysis
The relationship between the variables of the data obtained including the dependent and
independent variables was examined. The Pearson correlation coefficient was used to test the
relationship and validate the first hypothesis of the study.The researcher tested the null
hypothesis that there is no statistically significant relationship between cash holdings and firm
performance. The results obtained from the correlation analysis are presented in table 3 below.
CASH HOLDING AND COMPANY PERFORMANCE 27
Table 3
1 2 3 4 5 6 7 8
1 Cash Holdings 1
Term Investments
The Pearson correlation value between cash holdings, and return on equity (firm
performance) is r=0.934. The value (r=0.934) is statistical significant (p < 0.05). Hence, we
reject the null hypothesis of the test and we conclude that there is a statistically significant
relationship between cash holdings and firm performance. This confirms that the null hypothesis
of the research study is not valid. Moreover, the relationship between cash holdings and firm
0.7 and 1. This indicates that an increase in cash holdings leads to positive substantial increase in
company performance. These means that those firms with high cash holdings tend to have
equivalent high performance margins.Figure 2 below illustrates the performance level based on
Figure 2
10
Return on Equity (ROE)
0
-40 -30 -20 -10 0 10 20 30
-5
-10
Cash holdings
Figure 2 indicates that companies with large amount of cash holdings also have a high
return on equity while those companies with low levels of cash holdings indicate low levels of
return on equity. This shows that the higher the cash holdings that company accumulate the
higher the level of performance while low cash holdings is associated with low performance.
Additionally, the results in table 3 also indicate that there is also a statistical significant
relationship between cash holdings and cash (r=0.077), cash and short-term investment
(r=0.089), total assets (r=0.124) and total liabilities (r=0.133). There is no relationship between
cash holdings and net assets. Return on equity (firm performance) has an inverse relationship
with all variables included except cash holdings and net income.
Test of Means
A two independent sample test was carried out to determine whether there is any
difference in performance between companies with high cash holdings and those with low cash
holdings. The companies were ranked depending on the cash holdings (cash ratio) wheby those
companies with cash holdings > 1 were considered as having high levels of cash holdings while
CASH HOLDING AND COMPANY PERFORMANCE 29
those companies with cash holdings < were considered to have low levels of cash holdings. The
researcher tested the null hypothesis that there is no significant difference between the
performances of companies with high levels of cash holdings compared to companies with low
levels of cash holdings. The test assumed equal variances of the different groups of companies.
Table 4
Table 5
Mean
T Df tailed) e Difference
Based on the results, there were 200 companies with high level of cash holdings while
479 companies had lower levels of cash holdings. From the analysis, the t-value for the
difference in means between the two groups was 2.149. The p-value (p = 0.032) was significant
(p < 0.05). Hence we reject the null hypothesis and conclude that there is a significant difference
between the performances of companies with high levels of cash holdings compared to
Regression Analysis
Linear regression analysis was performed to establish the causal relationship between
corporate cash holdings and performance. The researcher tested the null hypothesis that cash
holdings has no significant effect on the firm performance. A linear regression model was
formulated from the results obtained in table 8 below. The tables below presents the results of
Table 6
Table 7
ANOVAReport (n=679)
Sum of
Table 8
Unstandardized Coefficients
Based on the results the cash holdings has a p-value (p= 0.000) which is significant (p<
0.05). Therefore we reject the null hypothesis and conclude that cash holdings has a significant
effect on the company performance. The results also indicate that cash holdings as the
dependent variable explains 87.2% of the variation in company performance (return on equity) as
the dependent variable. The model formulated between cash holdings and company performance
Introduction
The purpose of the study was establish the link that exist between cash holdings and
company performance by investigating whether corporate cash holdings have any effect on the
firm performance. The study also aimed to establish whether there is a significant relationship
between cash holdings and performance The study further sought to establish whether there was
a difference in the level of performance between firms with high cash holdings compared to
those firms with low cash holdings.The study was structured under the framework of the trade-
The study established several key findings based on the sample data consisting of 679
non-financial companies from different sectors. The study established that corporate cash
holdings has a significant effect on the company performance. The study also establish that a
positive strong relationship exist between corporate cash holdings and firm performance. The
study found that companies with higher levels of cash holdings have experience high company
performance. Also there is a difference in performance between companies with high cash
This section interprets and discusses the findings established from the study based on the
existing literature. The sections considered results obtained from the inferential analysis. The
corporates cash holdings were found to have an effect on the performance of the companies
based on the level of cash that firms hold. The study is consistent with findings from La Rocca
and Cambrea (2016) who indicate that cash holdings are tools that companies use to make
decisions and drive business performance. The authors also suggest that holding cash is directed
CASH HOLDING AND COMPANY PERFORMANCE 34
to the companys objective of maintaining greater levels of financial flexibility which enables the
company to venture into investment opportunities that are profitable leading to company
performance. The study is also consistent to findings by Bates, Kahle and Stulz (2009) who
argue that the high levels of economic performance in the US is attributed to fact that more and
more companies in the US are holding cash as a precautionary measure and to avoid transaction
cost of sourcing funds from external financing. Bates, Kahle and Stulz (2009) and Saddour
(2006) also indicate that the aspect of holding cash is designed to support the company process
of value creation which is associated with high performance of the company. Moreover, the
results relate to empirical findings obtained by Pinkowitz, Stulz and Williamson (2006) as well
as Saddour (2006) that demonstrate that holding cash leads to positive increase in performance.
From the study findings we observe that the relationship between cash holdings and
company performance is dependent based on the strong correlation shared between the two
variables. Further, the study also finds that cash holdings explains a very large percentage of the
variation in the level of company performance. The findings concur with findings from La Porta
(2002) who argues that the relationship between cash holding and performance is independent.
The study also found that the larger the amount of cash holdings that a companies have
the higher the performance the company. Also companies with high levels of cash holdings
perform better than those companies with lower levels of cash holdings. This is supportedby
argument from Dittmar, Mahrt-Smith and Servaes (2003) who indicate the profitable and high
performing companies hold more cash.Additionally, Myers and Majluf (1984) argue that large
cash holdings enables companies to undertake positive and profitable investments that increases
the value of the firm. La Rocca and Cambrea (2016) also indicated that large reserves of cash are
important for financial flexibility, competitive advantage and performance of the firm.
CASH HOLDING AND COMPANY PERFORMANCE 35
Additionally La Porta (2002) affirms that companies with higher levels of cash holdings perform
better compared to those companies with lower levels of cash holdings which tend to perform
poorly. Low levels of cash holdings is associated to increased borrowing and extra costs of
transaction which is associated to the poor performance of such companies with low cash
reserves.
Several limitations affected the results obtained and limited the validity, reliability and
generalization of the current research study. The current study did not control the impact of
external variables such as corporate governance, firm size, leverage and other moderating
variables on the effect of corporate cash holdings on the firm performance. The study only
focused on investigating cash holdings from corporate companies in china and therefore the
results of the study cannot be generalized to other countries. Additionally, the data used in the
current research study is secondary data obtained from Compstat database. The use of primary
data from corporate companies in North America would make the study more valid and reliable.
Moreover, only active companies were included in the research study. Inclusion of non-active
companies would have added more information to the research making the results generalizable
The current study is among the first studies to investigate the effect of corporate cash
holdings on the company performance in the North American region. The findings of the current
research has many potential outcomes. The study reveals the influence of corporate cash
holdings on the firm performance. Skilled and unskilled managers can gain insight from the
performance and value. Managers can also gain information on the value of holding large
amount of cash that would enable them to improve the financial flexibility of their companies,
More studies are needed focusing on other different regions of the world to enhance the
reliability of such myriad of studies as well as enhance the generalizations of the findings from
the current research study. Additionally, future studies on the topic should focus on investigating
the how moderating factors such as corporate governance, leverage, company size among others
affect the relationship between cash holdings and the firm performance.
Conclusion
The quantitative research design enabled the researcher to provide inference regarding
the effect of cash holdings on the performance on the wider population of North American
company based on the sample of companies selected. The study was able to establish significant
findings that would be beneficial to both managers and financial advisors in the field of financial
management. From the study it is evident that large amounts of cash holdings can significantly
improve a companys performance. It is also evident that companies that hold large amounts of
cash are more likely to perform better than companies with low amounts of cash holdings. The
research study adds significant literature on corporate cash holdings and its effect on the firm
performance.
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CASH HOLDING AND COMPANY PERFORMANCE 40
Appendixes
all item(s)