Fresh Evidence on Determinants of Corporate Cash Holdings

Abstract

We examine the consolidated impact of firm-level characteristics and macroeconomic factors on corporate cash holdings. Considering a sample of Indian non-financial firms from March 2001 to March 2016, we provide empirical evidence to show that board membership of ‘Finance Head’ and promoter ownership share a significant negative relationship with cash holdings. Results suggest that firms with higher degree of diversification and lower degree of financial distress have relatively lower cash holdings. In order to ascertain the precise impact of interest rates on cash holdings, the study marks a significant shift from the extant literature with regard to measurement of corporate liquidity by excluding short term debt instruments. The findings reveal that corporate cash and bank balance varies inversely with interest rates. Furthermore, we provide evidence for an increase in corporate cash holdings during the global financial crisis of 2008-09.