Does economic risk affect corporate cash holdings?

Ahmed Hunjra (), Tahar Tayachi, Rashid Mehmood and Anwaar Hussain

Journal of Economic and Administrative Sciences, 2021, vol. 38, issue 3, 471-484

Abstract: Purpose - Economic risk plays a vital role in firm's cash holdings. We aim to determine the impact of economic risk on the firm's cash holdings. Design/methodology/approach - The data is collected from the DataStream from 2002 to 2018, which covers 552 listed firms in the manufacturing sector of Pakistan, Sri Lanka, India and Bangladesh. We apply a two-step dynamic panel estimation to analyze the results. Findings - We use the variance of inflation and variance of interest rate as proxies of economic risk. Our results show that variance of inflation has a significant and negative effect while the variance of interest rate has a significant and positive effect on firms' cash holdings in selected countries. Furthermore, we find economic risk negatively affects the firm's cash holdings in the country-wise analysis. Firms should maintain a reasonable amount of cash reserves to handle uncertain situations. Originality/value - This study may provide insights to financial decision-makers of a firm for better cash management according the economic conditions of the country.

Keywords: Economic risk; Cash holdings; Dynamic panel; South Asia (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jeaspp:jeas-05-2020-0069

DOI: 10.1108/JEAS-05-2020-0069

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