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The Effect of Cash Holdings on Financial Performance: Evidence from Middle Eastern and North African Countries.

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Title: The Effect of Cash Holdings on Financial Performance: Evidence from Middle Eastern and North African Countries.
Authors: Yilmaz, Ilker, Samour, Ahmed
Source: Journal of Risk & Financial Management; Feb2024, Vol. 17 Issue 2, p53, 12p
Subject Terms: CASH position of corporations, FINANCIAL performance, RATE of return, ECONOMIC indicators, RETURN on assets, GROSS domestic product
Abstract: This work aimed to examine the effect of corporate cash holdings on financial performance. The data covered 536 non-financial firms for the 2006–2020 period from 11 MENA region countries. This study used fixed- and random-effects testing models. To the best of the authors' knowledge, this is the first study that aimed to study the effect of corporate cash holdings on financial performance in MENA countries in two aspects: linear and non-linear relationships. By using the return on assets, return on equity, earnings before interest, and the tax margin as the indicators of financial performance, we developed two groups of models investigating the linear and non-linear relationships between cash holdings and profitability measures. The models included several control variables, namely leverage, firm size, sales growth rate, tangibility, dividend pay-out ratio, and gross domestic product (GDP) growth rate. The results of this study revealed that both the linear and non-linear models produced significant results for the return on assets and the return on equity, but for the earnings before interest and tax margins, the linear model was insignificant. The non-linear models indicated an optimal level of cash holdings. In this context, the policymakers must actively evaluate these policies, such as working capital management and its effect on financial performance. In addition, the policymakers must consider macroeconomic conditions when designing corporate cash-holding policies. [ABSTRACT FROM AUTHOR]
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Database: Complementary Index
Description
Abstract:This work aimed to examine the effect of corporate cash holdings on financial performance. The data covered 536 non-financial firms for the 2006–2020 period from 11 MENA region countries. This study used fixed- and random-effects testing models. To the best of the authors' knowledge, this is the first study that aimed to study the effect of corporate cash holdings on financial performance in MENA countries in two aspects: linear and non-linear relationships. By using the return on assets, return on equity, earnings before interest, and the tax margin as the indicators of financial performance, we developed two groups of models investigating the linear and non-linear relationships between cash holdings and profitability measures. The models included several control variables, namely leverage, firm size, sales growth rate, tangibility, dividend pay-out ratio, and gross domestic product (GDP) growth rate. The results of this study revealed that both the linear and non-linear models produced significant results for the return on assets and the return on equity, but for the earnings before interest and tax margins, the linear model was insignificant. The non-linear models indicated an optimal level of cash holdings. In this context, the policymakers must actively evaluate these policies, such as working capital management and its effect on financial performance. In addition, the policymakers must consider macroeconomic conditions when designing corporate cash-holding policies. [ABSTRACT FROM AUTHOR]
ISSN:19118066
DOI:10.3390/jrfm17020053