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The role of financial constraints on precautionary cash holdings: evidence from Pakistan

Azmat, Qurat-ul-Ain, Iqbal, Abdullah (2017) The role of financial constraints on precautionary cash holdings: evidence from Pakistan. Economic Research-Ekonomska Istraživanja, 30 (1). pp. 596-610. ISSN 1331-677X. E-ISSN 1848-9664. (doi:10.1080/1331677X.2017.1305770)

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Abstract

This study aims to investigate the direct relationship between precautionary cash holdings, cash flow volatility and the financial constraints of Pakistani firms for the period 2003–2013.The study also takes into account the 2008 financial crisis. This study seeks to discover that if a firm is financially constrained and its cash flows are highly volatile then it will increase its cash holdings and voluntarily reduce its current investment level due to the intertemporal trade-off between current and future investments. Thus, a positive relationship between cash holdings and future cash flow volatility and a negative relationship between current investments and future cash flow volatility is expected. In order to test the impact of cash flow volatility firms are classified in to constrained and unconstrained groups on the basis of four criteria, i.e., firm size, dividend payment, KaplanZingales (KZ) index and group affiliation. For each criterion estimation is done by using two steps Generalised Method of Moments (GMM) estimator. Results show that financially constrained firms increase their cash holdings when cash flow volatility increases while financially unconstrained firms do not, except for KZ index criteria. It is also found that during the 2008 financial crisis constrained firms were more prone to saving cash than unconstrained ones. The study provides important insights into understanding the behaviour of Pakistani firms relating to cash holdings when they are financially constrained and cash flows are highly volatile. This is the first study of its kind that establishes a conclusive relationship between precautionary cash holdings, cash flow volatility and financial constraints in a Pakistani context.

Item Type: Article
DOI/Identification number: 10.1080/1331677X.2017.1305770
Uncontrolled keywords: Cash holdings; cash flow volatility; financial constraints; financial crisis; panel data; Generalised Method of Moments (GMM)
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Divisions: Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User: Abdullah Iqbal
Date Deposited: 19 Apr 2017 17:22 UTC
Last Modified: 29 May 2019 18:30 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/59756 (The current URI for this page, for reference purposes)
Azmat, Qurat-ul-Ain: https://orcid.org/0000-0001-8735-5194
Iqbal, Abdullah: https://orcid.org/0000-0002-3013-1007
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