Corporate Cash Holdings: an Empirical Investigation of Southeast European Companies

Abstract

The purpose of this paper is to build a synthesis of the three theoretical models of corporate cash holding motives: trade-off theory, pecking order theory and free cash flow theory, and to examine their relative contribution in explaining actual corporate cash holdings in South-East European countries. We are specifically interested in the issue of whether firms actively pursue implicit cash targets or whether cash holdings are deemed unimportant and therefore passively adjust to (more important) financial decisions taken elsewhere in the firm. This paper investigates the empirical determinants of corporate cash holdings for a sample of 877 firms from ten South-East European countries (Bosnia and Herzegovina, Bulgaria, Montenegro, Croatia, Greece, Romania, Macedonia, Slovenia, Serbia and Turkey). Using their financial data for the period 2005-2015, we apply a panel regression model, involving cash ratio as a dependent variable and several firm characteristics as independent variables that closely determines the corporate cash holdings. The results of the analysis found supportive evidence of a pecking order theory of cash holdings according to which the firms do not have a target optimal cash level, and cash is used as a buffer between retained earnings and investments of the firm. In particular, we found that corporate cash holdings in the SEE countries decrease significantly with the net working capital as a cash substitute, leverage of the firm, cash flow uncertainty, and capital expenditures. Cash holdings in SEE countries increase significantly with the firm size, cash flow and debt maturity. This study will contribute in understanding the factors affecting corporate liquidity by financial managers in the South-East European countries.