Determinants of Corporate Cash Holdings

Abstract

This study examines the determinants of corporate cash holdings among non-financial firms listed on the Pakistan Stock Exchange (PSX). Corporate cash holdings play a vital role in ensuring liquidity, financing operational activities, and reducing dependence on external sources of finance. Drawing on Trade-off Theory, Pecking Order Theory, and Agency Theory, the study investigates the impact of cash flow, net working capital, leverage, firm age, firm size, profitability, dividend payout, and capital expenditure on corporate cash holdings. The analysis is based on a panel dataset comprising 1,573 firm-year observations and employs a fixed-effects regression model to control for unobserved firm-specific characteristics. The findings reveal that cash flow, profitability, and firm size have a positive and statistically significant effect on corporate cash holdings, while capital expenditure has a significant negative effect. In contrast, net working capital, leverage, firm age, and dividend payout are found to be statistically insignificant determinants of cash holdings. The results support the Pecking Order Theory, suggesting that firms prefer internally generated funds and therefore accumulate cash reserves from operational earnings. The negative relationship between capital expenditure and cash holdings indicates that firms utilize available liquidity to finance long-term investments. The study contributes to the corporate finance literature by providing evidence from an emerging market and offers practical implications for managers and investors in designing effective liquidity management strategies under conditions of financial constraints and economic uncertainty.