The Financial Determinants of Corporate Cash Holdings: Does Shariah-Compliance Matter?

Abstract

Purpose: The purpose of this study is to explore the difference between the determinants of cash holdings of shariah-compliant and non-shariah-compliant firms, for non-financial corporations in the Gulf Cooperation Council (GCC).

Methodology: The data includes all non-financial firms listed in six GCC markets over the period 2005 to 2016. The Ideal Ratings database is used to identify shariah-compliant firms in the GCC. To examine the determinants of cash holdings, static model is used. To confirm the applicability of the method applied, the Breusch-Pagan Lagrange Multiplier (LM) and Hausman (1978) are employed to choose the most efficient and consistent static panel regression.

Findings: The Results show that, for shariah-complaint firms, the relevant determinants of cash holdings are leverage, profitability, capital expenditure, and net working capital. For non-shariah-compliant firms, the only relevant determinants of cash holdings are leverage and net working capital. The findings suggest that cash holding decisions of shariah-complaint firms can be best explained using the pecking order theory. This reveals that shariah-compliant firms use liquid assets as their first financing option since, due to the shariah regulations.

Research limitations/implications: Future studies may investigate the optimal levels of cash holdings and compare the adjustment speeds toward target cash holdings of both the shariah-compliant firms and their conventional counterparts.

Originality/value: This study is the first to investigate the difference between the determinants of cash holdings of shariah-compliant and non-shariah-compliant firms.