Running head: CASH HOLDING AND COMPANY PERFORMANCE 1

Cash Holding and Company Performance

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CASH HOLDING AND COMPANY PERFORMANCE 2

Table of Contents

Chapter 1: Introduction ................................................................................................................... 4

Background ................................................................................................................................. 4

Research Purpose ........................................................................................................................ 6

Definition of Terms..................................................................................................................... 7

Chapter 2: Literature Review .......................................................................................................... 8

Introduction ................................................................................................................................. 8

Theoretical Framework ............................................................................................................... 8

Motives of Cash Holdings ........................................................................................................ 10

Corporate Cash Holding and Firm Performance ...................................................................... 15

Chapter 3: Methodology ............................................................................................................... 18

Introduction ................................................................................Error! Bookmark not defined.

Study Purpose ........................................................................................................................... 18

Research Questions ................................................................................................................... 18

Research Hypotheses ................................................................................................................ 19

Hypothesis 1.......................................................................................................................... 19

Hypothesis 2.......................................................................................................................... 19

Hypothesis 3.......................................................................................................................... 19

Research Design........................................................................................................................ 19

Target Population ...................................................................................................................... 20

Sample and Sampling Procedure .............................................................................................. 20

Data Collection Technique and Procedure ............................................................................... 21

Data Analysis ............................................................................................................................ 21

CASH HOLDING AND COMPANY PERFORMANCE 3

Operationalization of study variables ................................................................................... 22

Chapter 4: Data Analysis Results ................................................................................................. 23

Introduction ................................................................................Error! Bookmark not defined.

Descriptive Statistics ................................................................................................................. 23

Inferential Analysis and Hypotheses Testing ........................................................................... 25

Test for Normality..................................................................................................................... 25

Correlation Analysis ................................................................................................................. 26

Relationship between Cash Holdings and Firm Performance .................................................. 26

Test of Means ............................................................................................................................ 28

Regression Analysis .................................................................................................................. 30

Chapter 5: Discussion, Conclusions and Recommendations ........................................................ 33

Introduction ............................................................................................................................... 33

Interpretation of the Findings.................................................................................................... 33

Limitation of the Study ............................................................................................................. 35

Implications and Recommendations for Future Research ........................................................ 35

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

is readily available for investments, fund company operations or distribute to shareholders, or

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

(Dittmar &Mahrt-Smith, 2007).According to Dittmarand and Mahrt-Smith (2007) companies

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

Most scholars in literature have focused on investigating determinants of cash holdings

and its consequences for firms behavior (Amess, Banerji &Lampousis, 2015). Other kinds of

literature on cash holdings focus on investigating theoretical perspectives of corporate cash

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

performance. Additionally, most scholars in finance considering holdings or savings in previous

CASH HOLDING AND COMPANY PERFORMANCE 6

analysis have majorly focused their attention on household or personal holdings as well as

national holdings as compared to the attention on corporate holdings (Horioka &

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

influence on the company performance.

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.

Significance of the Study

The study is significant as it contributes to the growing literature concerning corporate

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

can use this information in planning their cash holdings strategies.

Definition of Terms

Corporate cash holdings - Refers to the sum of a companys cash and its marketable

securities.

Organization/firm/company performance Refers to the level to which an organizational

goal is attained (Dwight, 1999).

Liquid asset refers to cash on hand or assets/holdings that can be readily be transformed

to cash (Davis &Charemza, 2012).

CASH HOLDING AND COMPANY PERFORMANCE 8

Chapter 2: Literature Review

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

following section describes the theoretical framework of the study.

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

distress(Opler, Pinkowitz, Stulz& Williamson, 2001).The theory further indicates that

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

management of corporate cash holdings to prevent a companys financial constraints.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;

Opler, Pinkowitz, Stulz & Williamson, 1999; Ramadan, 2015).

Motives of Cash Holdings

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

provide high-interest entrusted loans.

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).

The determinants of cash holdings

Previous studies have reported various determinants of holdings (Al-Najjarand Belghitar,

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

following determinants: leverage, Dividend payments, Profitability, Growth opportunities and

Firm size among various others.

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.

Myers and Majluf (1984) study indicates investment opportunities as a determinant of

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

underinvestment problem (Harford, 1999).

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

between leverage and cash holdings.

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

relationship between dividends and cash holdings.

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.

According to the tradeoff theory, there is a definiterelationship between growth

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

definite link between growth opportunities and cash holdings.

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

of managerial discretion, managerial ownership, investment opportunities, length of cash

conversion cycle, taxes, liquidity premium and cash flow uncertainty (Opler, Pinkowitz, Stulz&

Williamson, 2001).

Corporate Cash Holding and Firm Performance

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

holding perform poorly.

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

the company performance.ROE is an accounting measure of the firm performance (Al-Matari,

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?

2. Does corporate cash holdings significantly affect the firm performance?

3. Is there a difference between the performances of companies with high levels of cash

holdings compared to companies with low levels of cash holdings?

CASH HOLDING AND COMPANY PERFORMANCE 19

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.

H1: Corporate cash holdings 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

performance of the firm.

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.

Sample and Sampling Procedure

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 Collection Technique and Procedure

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

appendix section including the variables selected.

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

quantitatively.Additionally, the data analysis also involved inferential statistics constituting of

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.

Operationalization of study variables

Operationalization is the process of defining variables into measurable factors (Kaur,

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

represent the cash ratio of the variables.

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

shareholders equity/net assets (total assets less total liabilities).

CASH HOLDING AND COMPANY PERFORMANCE 23

Chapter 4: Data Analysis Results

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

Descriptive Report (n=679)

N Minimum Maximum Mean SD Skewness Kurtosis

Cash 679 401.00 420658.27 5892.07 21630.06 12.560 210.56

Cash and Short-

679 401.00 619602.00 14214.98 47963.95 7.001 61.43
Term Investments

Total Assets 679 1499.00 3287968.00 119987.82 316043.79 5.392 34.98

Net Income 679 200.27 45687.00 2260.32 3724.54 4.791 35.75

Net Assets 679 -13758.00 286359.00 19109.55 33563.76 4.136 21.58

Cash Holdings 679 -34.90 156.06 1.06 6.60 18.910 451.83

Return on Equity 679 -6.70 143.59 .38 5.56 25.345 653.86

Total liabilities 679 4.00 3281897.00 100878.27 295686.81 5.664 39.13

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

the companies represented companies with low cash holdings.

Figure 1
CASH HOLDING AND COMPANY PERFORMANCE 25

Inferential Analysis and Hypotheses Testing

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.

Test for Normality

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

results of the test are indicated in Table 2 below.

Table 2

Tests of Normality Report (n=679)

Shapiro-Wilk

Statistic Df Sig.

Return on Equity .448 679 .058

Cash holdings .413 679 .081

*p < .05

Return on Equity (firm performance) had a statistically insignificant p-value (p =0.058)

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 to test the validity of the first hypothesis.

Correlation Analysis

Relationship between Cash Holdings and Firm Performance

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

Correlation of Study Variables (n=679)

1 2 3 4 5 6 7 8

1 Cash Holdings 1

2 Return on Equity .934* 1

3 Cash .077* -.010 1

4 Cash and Short- .089* -.012 .671* 1

Term Investments

5 Total Assets .124* -.010 .597* .839* 1

6 Total Liabilities .133* -.007 .593* .822* .996* 1

7 Net Assets .000 -.027 .399* .651* .640* .571* 1

8 Net Income .041 .016 .233* .483* .452* .403* .701* 1

Correlation is significant at = 0.05 (2-tailed)

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

performance is a strong positive relationship. A strong positive relationship is usually between

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

the level of cash holdings that companies hold.

CASH HOLDING AND COMPANY PERFORMANCE 28

Figure 2

Cash Holdings and Performance

15

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.

The results of the analysis are presented in table 4 and 5 below.

Table 4

Group Statistics (n=679)

company rank based on Std. Std. Error

cash holdings N Mean Deviation Mean

return on High 200 1.0901 10.18472 .72017

equity Low 479 .0878 .54943 .02510

Table 5

Results of Independent Samples Test (n=679)

t-test for Equality of Means

CASH HOLDING AND COMPANY PERFORMANCE 30

Mean

Sig. (2- Differenc Std. Error

T Df tailed) e Difference

return on Equal variances

2.149 677 .032 1.00228 .46649
equity assumed

Equal variances not 199.48

1.391 .166 1.00228 .72061
assumed 4

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

companies with low levels of cash holdings.

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

the regression analysis.

Table 6

Model Summary Report (n=679)

CASH HOLDING AND COMPANY PERFORMANCE 31

Std. Error of the

Model R R Square Adjusted R Square Estimate

1 .934 .872 .871 1.99290

Table 7

ANOVAReport (n=679)

Sum of

Model Squares Df Mean Square F Sig.

1 Regression 18239.195 1 18239.195 4592.354 .000b

Residual 2688.803 677 3.972

Total 20927.998 678

a. Dependent Variable: return on equity

b. Predictors: (Constant), cash holdings

Table 8

Regression Coefficients (n = 679)

Unstandardized Coefficients

Model B Std. Error T Sig.

1 (Constant) -.447 .077 -5.775 .000

cash holdings .786 .012 67.767 .000

a. Dependent Variable: return on equity

CASH HOLDING AND COMPANY PERFORMANCE 32

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

is also significant (p= 0.000). The model is as follows:

Company Performance = -0.447 + 0.786 Cash Holdings.

CASH HOLDING AND COMPANY PERFORMANCE 33

Chapter 5: Discussion, Conclusions and Recommendations

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-

off theory and employed a quantitative research design.

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

holdings and those with low cash holdings.

Interpretation of the Findings

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.

Limitation of the Study

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

to all non-financial companies in North America.

Implications and Recommendations for Future Research

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

study on the importance of corporate cash holdings in leading to improved company

CASH HOLDING AND COMPANY PERFORMANCE 36

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,

competitive advantage as well as performance.

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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Appendixes

Compustat North America Data Request Summary

Data Request ID 18168bae9e909b3a

Libraries/Data Sets compm/funda /

Frequency/Date Range ann / 01Jan2010 - 31Aug2017

Search Variable GVKEY

Input Codes -all-

all item(s)

Conditional Statements n/a

Output format/Compression sav /

Variables Selected AT CH CHE LT NI CHECH

Extra Variables and Parameters Selected C INDL STD