Determinants of Corporate Cash Holdings: Evidence from India

Abstract

We examine the evolution and determinants of corporate cash holdings of Indian non-financial firms for the period 2001-2016. In contrast to a prominent increase in corporate liquidity levels globally after the global financial crisis, we document a gradual decline in corporate cash holdings of Indian non-financial firms. We provide empirical evidence to show that profitability, operating cash flow and cash flow volatility are positively associated with cash holdings. Further, our results suggest that size,
leverage, liquidity, capital expenditure and promoter ownership share a negative relationship with cash holdings. In addition, we do not find concrete empirical evidence regarding relationship of corporate cash holdings with growth potential and dividend payments. Our results are broadly consistent across five panel data estimation techniques namely pooled ordinary least squares regression, Fama-MacBeth procedure, fixed effects estimator, between effects estimator and system generalised method of moments estimator. Moreover, we use an alternative proxy of corporate cash holdings to reinforce the robustness of our findings. Finally, our results show that a typical Indian non-financial firm achieves target cash levels in a time span of 2.18 years on an average, thereby highlighting a slower speed of adjustment of corporate cash holdings as compared to firms in developed economies.