This paper aims to document the impact of corporate cash holdings on firm performance in Middle East and North African (MENA) emerging markets. The authors also examine how the quality of national governance shapes the interaction between corporate cash holdings and firm performance.,The authors employ data from non-financial firms listed on the stock markets of twelve MENA countries between 2004 and 2018. The empirical model avoids the shortcomings of the prior literature by applying a dynamic framework to the relationship between cash holdings and firm performance.,This research reports a significant positive relationship between corporate cash holdings and firm performance. The results appear to be more pronounced in countries with strong national governance and more developed institutional settings. The findings demonstrate that most benefits of corporate cash holdings can be achieved under strong institutional settings. The authors argue that the positive impact that national governance has on individual firms by reinforcing investors' protection and lowering agency problems increases the added value of cash holdings.,The findings should encourage local authorities and policymakers to reinforce the law and instigate new regulations to strengthen the quality of national governance and restore the integrity of local markets.,Prior studies have largely been silent on how national governance can shape the relationship between corporate cash holdings and firm performance. This paper draws attention to this issue within the context of MENA emerging markets. To the authors' best knowledge, this is the first study that explores the interaction between cash holdings, firm performance and national governance in MENA emerging markets.

Corporate cash holdings, firm performance and national governance: evidence from emerging markets

Corporate cash holdings always involve a trade-off between benefits and costs. This study investigates the determinants of corporate cash holdings. Cash flows, leverage, liquidity, cash flows volatility, profitability, growth opportunities, firm size, debt maturity, and dividend represent the independent variables in the research study. It is based on a panel data of 150 Pakistani non-financial listed firms on KSE during the period 2004-2012. Panel regression analysis has been conducted to determine the major factors affecting cash holdings. The results imply that growth opportunity, company size, cash flows, and profitability of the firms exert a positive effect while leverage and liquidity show a significant negative impact on corporate cash holding. The findings indicated that both pecking order theory and trade-off theory play an important role in explaining the determinants of corporate cash holdings. The findings are beneficial for managers, shareholders, investors, regulatory bodies, and researchers for developing appropriate policies.

Determinants of Corporate Cash Holdings in Pakistan

Corporate cash holdings and promoter ownership

We examine whether firms manipulate their reported earnings after winning investment project bids. China’s adoption of the public-private partnership (PPP) provides a unique setting for our analysis. Using the PPP announcements to identify the firms participating in PPP projects, we find that firms use both accrual-based and real earnings management methods to improve their short-term performance after PPP participation. Our findings survive difference-in-differences design with propensity score matching. We document that PPP-participating firms have strong incentives to manipulate earnings because of abnormal administrative expenditure and greater short-term performance pressure than non-PPP-participating firms. The auditors respond by charging higher audit fees due to the increased risk. Moreover, earnings management lessens for firms with more government subsidies as they ease the performance pressure. Overall, this study documents the unintended consequences of PPP participation.

Do Firms Manipulate Earnings after Winning Public-Private Partnership Bids? Evidence from China

PurposeMotivated by the agency theory, this paper primarily intends to empirically investigate the impact of board attributes on corporate cash holdings and how the mentioned nexus is moderated by the level of corporate political connections in a developing country, namely, Palestine during the period of 2011–2018.Design/methodology/approachMultiple regression analysis on a panel data was employed. Moreover, the authors applied three different approaches of static panel data “pooled OLS, fixed effect and random effect”. Fixed-effects estimator was selected as the optimal and most appropriate model. In addition, to control for the potential endogeneity problem and to profoundly analyze the study data, the authors perform the one-step system generalized method of moment estimator.FindingsThe results of this study provide support for the agency theory ideology, which considers that sturdy and well-established corporate governance (CG) paradigms minify the magnitude of cash held by companies. Furthermore, the findings distinctly unveil that the impact of board attributes is more positive under a high level of political connections.Research limitations/implicationsThis study was solely restricted to one institutional context “Palestine”; therefore, the results reflect the attributes of the Palestinian business environment. In this vein, it is possible to generate different findings in other countries, particularly in developed markets.Practical implicationsThe findings of this study can draw responsible parties, top management and policymakers' attention in developing countries to introduce and contextualize new mechanisms that can lead to better managing of corporate cash holdings.Originality/valueEmpirical evidence on the moderating role of political connection on the effect of board attributes on corporate cash holdings something that was predominantly neglected by the earlier research and has not yet examined by ancestors. Hence, to protrude nuanced understanding of this novel idea, this study minutely bridges this research gap and contributes practically and theoretically to the existing CG–cash holdings literature.

Ching-Pao Kao

Papers

The impact of political connections and business groups on cash holdings: Evidence from Chinese listed firms