International Journal of Finance & Managerial Accounting

International Journal of Finance & Managerial Accounting

The Role of Financial Position and Leverage in Cash Holdings Adjustment Speed Using the Dummy Variable and Dynamic Threshold Models

Document Type : Original Article

Authors
Milad Emamgholipour Archi 1
Seyed Ali Nabavi Chashmi 2
Iman Dadashi 3
Maryam Shafiee Kakhki 4
1 Ph.D. Student, Department of Accounting, Babol Branch, Islamic Azad University, Babol, Iran
2 Department of Management, Babol Branch, Islamic Azad University, Babol, Iran
3 Department of Accounting, Babol Branch, Islamic Azad University, Babol, Iran
4 Department of Economic, Babol Branch, Islamic Azad University, Babol, Iran
10.30495/ijfma.2023.21144
Abstract
Cash is a crucial resource for businesses, and balancing available cash and needs is the most important business health factor. Therefore, companies seek an optimal cash level according to cost-benefit analysis to maximize their value; and determining optimal cash holdings, target cash holdings adjustment speed, and the effect of firm-specific characteristics are incredibly important to managers. The present study aims to test asymmetric models of cash holdings adjustment speed according to financial positions and leverage. In this regard, 117 firms listed on the Tehran Stock Exchange were selected and their 2009-2018 financial information was analyzed. The findings of asymmetric models are shown and suggest that among firms with high fiscal deficit and leverage, firms with high cash regime reach optimal cash holdings faster than firms with low cash regime. The results indicate an optimal level of cash holdings that allows firms to optimally deviate from target cash holdings. Also, when firms leave the optimal range of cash holdings, rapid adjustments are partial and asymmetric.
Keywords
Cash Holdings Adjustment Speed
Asymmetric Models
Fiscal Deficit or Surplus
Leverage
  • Alles, L., Lian, Y., and Xu, C.Y. (2012). The Determinants of Target Cash Holdings and Adjustment Speeds: An Empirical Analysis of Chinese firm. In 2012. Financial Markets & Corporate Governance Conference in Singapore http://dx.doi.org/10.2139/ssrn.1981818.
  • Almeida, H., Campello, M., and Weisbach, M. (2004). The cash flow sensitivity of cash. The Journal of Finance, 59, pp. 1777-1804.
  • Bai, J., and Perron, P. (2003). Computation and analysis of multiple structural change models. Journal of Applied Econometrics, 18, pp. 1-22.
  • Bates, T., Kahle, K., and Stulz, R. (2009). Why do US firms hold so much more cash than they used to? The Journal of Finance, pp. 1985-2022.
  • Byoun, S. (2008). How and when do firms adjust their capital structures toward targets? Journal of Finance, 63, pp. 3069-3096.
  • Chang, Y., Benson, K.L., and Faff, R.W. (2017). Asymmetric Modelling of the Cash holdings adjustment speed. Working Paper. http://dx.doi.org/10.2139/ssrn.2914986.
  • Dang, V.A. (2011). Leverage, debt maturity and firm investment: An empirical analysis. Journal of Business Finance & Accounting. 38(1-2), pp. 225-258.
  • Dastgir, M., Yousefi, A., and Imani, K. (2013). The Cash holdings adjustment speed and firm characteristics. Accounting Research, 3(3), 19-33.
  • Dittmar, A., and Duchin, R. (2010). The Dynamics of Cash. Pacific-Basin Finance Journal, 55(2), pp. 270-282.
  • Fakhaari, H., and Asadzadeh, A. (2017). The effect of leverage and free cash flow on the Cash holdings adjustment speed. Financial Management Strategy, 5(4), 1-23.
  • Faulkender, M., Flannery, M.J., Hankins, K.W., and Smith, J.M. (2012). Cash flows and leverage adjustments. Journal of Financial Economics, 103, pp. 632-646.
  • Flannery, M.J., and Rangan, K.P. (2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79, pp. 469-506.
  • Han, S., and Qiu., J. (2007). Corporate Precautionary Cash Holdings. Journal of Corporate Finance 13, pp. 43-57.
  • Hansen, B.E. (1999). Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference. Journal of Econometrics, 93, pp. 345-368.
  • Huang, R., and Ritter, J. (2009). Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative Analysis, 44.
  • Jensen, M. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76, pp. 323-329.
  • Kalak, I., Goergen, M., and Guney, Y. (2020). CEO Overconfidence and the Speed of Adjustment of Cash Holdings. Finance Working Paper. http://dx.doi.org/10.2139/ssrn.3547283.
  • Karami Taleghani, F., and Vatanparast, M. R. (2020). The effect of financial distress on the adjustment speed of cash holding with an emphasis on growth opportunities and fiscal constraints. Accounting and Management Outlook, 3(36), 26-46.
  • Khani, A., and Yousefi, A. (2013). Analyzing cash holding adjustment speed toward the optimal level in firms listed on the Tehran Stock Exchange using the generalized motion method. Second National Conference on Accounting, Financial Management and Investment, Gorgan, Scientific and Professional Association of Golestan Managers and Accountants.
  • Oler, D. and Picconi, M. (2009). Implications of insufficient and excess cash for future performance. Journal of Financial Economics, Vol. 65, pp. 223-247.
  • Opler, T., Pinkowitz, L., Stulz, R., and Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52.
  • Orlova, S.V. and Rao, R.P. (2018). Cash Holdings Speed of Adjustment. International Review of Economics and Finance. http://dx.doi.org/10.1016/j.iref.2017.12.011.
  • Siddiqua, G.A., Rehman, A., and Hussain, S. (2019). Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms. Journal of Asian Business and Economic Studies, 26(1), pp. 76-97.
  • Smith, D., Chen, J., and Anderson, H. (2015). The influence of firm financial position and industry characteristics on capital structure adjustment. Accounting and Finance, 55, pp. 1135-1169.
  • K.D. (2021). Firm Characteristics and Cash Holdings Speed of Adjustment: Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 8(8), pp. 137-148.
  • Venkiteshwaran, V. (2011). Partial Adjustment Toward Optimal Cash Holding Levels. Review of Financial Economics, 20(3), pp. 113-121.

Zabihi, F., and Sadeghi Moghadam, S. (2014). Factors of cash holdings level in companies: Evidence from the Tehran Stock Exchange. Proceedings from the National Conference on the Role of Accounting in Realizing Multi-Year Government Development Plans