Corporate Diversification and Cash Holding

Abstract

Cash holding is one of company's internal funding sources that might be used for investment purposes. In fact, corporate investment funding policy may affect the magnitude of the cash holding because management must decide proper sources of the funds, i.e. internal and external priorities, and which sources will be taken first. This study aims at testing whether diversification strategies may reduce or increase the tendency of companies to save cashes in a company, either a financially-constrained, financially non-constrained or all of them. The sample taken in this study is manufacturing companies listed at the Indonesian Stock Exchange during 2006-2011 . They are selected by using a purposive sampling. Analytical techniques applied are the data analysis panel with the Ordinary LeastSquared (OLS) approach. The results indicate that diversification strategies have a negative and insignificant influence to the change of cash holding in a company. Companies tend to keep cash holding in response to a lower positive cash flow in a diversified company. The influence is stronger on a constrained company than a financially non-constrained one. The cash flows have a positive influence on cash holding. The trend is stronger on financiallyconstrained corporations. Meanwhile, market-to-book value of assets have an insignificant and positive influence to cash holding company. These influences also apply to financially non-constrained ones. However, the influence of market-to-book value of company assets in financially non-constrained companies cannot not be determined as they have no systematic patterns on either debt ratio, payout ratio, book-to-market asset ratio or the size of assets