Cash holdings in SMEs: speed of adjustment, growth and financing

Cristina Martínez-Sola (), Pedro J. García-Teruel () and Pedro Martínez-Solano ()
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Cristina Martínez-Sola: University of Alicante
Pedro J. García-Teruel: University of Murcia
Pedro Martínez-Solano: University of Murcia

Small Business Economics, 2018, vol. 51, issue 4, No 3, 823-842

Abstract: Abstract This paper studies the effect of growth opportunities, financial constraints and financial distress on the speed of adjustment of small and medium-sized enterprises (SMEs) to their target cash holdings. We use a sample of Spanish SMEs from the period of 1998 to 2012. The results support the existence of a target cash holding level to which small firms attempt to converge. Additionally, consistent with the precautionary motive for cash holdings, the results show that SMEs with greater growth opportunities adjust more quickly to their target cash holding level to preserve their financial flexibility and to be able to take advantage of profitable investment opportunities when they arise. Moreover, for SMEs in financial difficulties, the adjustment speed of cash is higher to avoid financial distress costs. Finally, we observe a faster speed of adjustment for cash holding in the crisis period for all firms, as a possible response to the credit restrictions faced by SMEs.

Keywords: Cash holdings; Speed of adjustment; SMEs (search for similar items in EconPapers)
JEL-codes: G30 G31 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11187-018-9990-y

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