Does Shariah compliance affect corporate cash holdings and cash adjustment dynamics? Evidence from Malaysia

Abstract

Purpose The purpose of this paper is to investigate the effect of Shariah compliance status on corporate cash holding decision. Design/methodology/approach This study applies ordinary least square and generalized method of moments regression models for a sample of 178 Malaysian listed firms over the period 2008–2017. Findings The results show that Shariah compliance has positive impact on the level of cash reserves of firms. It is also found that Shariah-compliant (SC) firms quickly adjust their level of cash holdings toward a target level than non–Shariah-compliant (NSC) firms. These results can be explained by the restrictions imposed by Shariah rules on firms to sustain their compliance status. Further, the results reveal that SC firms are likely to hold more cash out of their cash flows. This is the expected result, as the firms operating within the ambit of Shariah rulings and regulations face external financing constraints. Practical implications This study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering restrictions imposed by Shariah regulations. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which SC firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of the restrictions imposed by Shariah law on firm’s cash holding decision. Therefore, in an effort to increase the supply of external financing available to SC firms, policymakers should encourage the issuing of Islamic financial products. Originality/value This paper focuses on SC firms where financial constraints are bound to be more stringent than for NSC firms. It explores the implications of relevant Islamic principles on corporate cash holdings.

Economic policy uncertainty, geopolitical risk and cash holdings: evidence from Saudi Arabia

“…Second, our study differs from those focusing on Shariah-compliance and corporate cash holdings (e.g. Guizani & Abdalkrim, 2021;Bugshan et al, 2021) to the extent that these studies examine the direct effect of Shariah-compliance on cash holding decision, whereas, our study examines whether Shariah-compliance moderates the relationship between both EPU and GPR and corporate cash holdings.…”

“…The debate on the restrictions imposed by Shariah principles as potential determinants of corporate financial decisions has triggered the interest of several studies in recent years. This body of work includes Alnori and Alqahtani (2019), Bugshan et al (2021) and Guizani and Abdalkrim (2021), who show that SC firms face several financial restrictions [1] to maintain their compliance status. These restrictions relate to various financial decisions, including investments, financing, operations and risk management decisions.…”

“…The implication of these restrictions is that SC firms are more constrained in their financing choices. Therefore, owing to the lower supply of external funds, these firms incur higher transaction costs (Guizani & Abdalkrim, 2021). As a result, SC firms are required to hold large amounts of cash reserves to reduce their external financing needs and the associated costs that can result.…”

“…Under this perspective, managers, confronted with a low investment opportunity set, have the incentive to hoard excess cash to benefit themselves at the expense of investors. By retaining excess cash flow, managers reduce their need for raising external funds, which in turn gives them the freedom from capital market monitoring (Guizani & Abdalkrim, 2021). As pointed out by Attig et al (2021), firms are likely to be more vulnerable to agency problems during high-uncertainty periods since these periods are associated with decreased real economic activities (Baker, Bloom, & Davis, 2016) and depressed corporate capital investment (Javadi et al, 2021).…”

“…In further analyses, we investigate whether Shariah-compliance as well as financial constraints affect the relationship between both EPU and GPR and corporate cash holdings. Recent studies indicate that Shariah-compliant (SC) firms face several financial restrictions to maintain their compliance status (Alnori & Alqahtani, 2019; Bugshan, Alnori, & Bakry, 2021; Guizani & Abdalkrim, 2021). In particular, these firms have access to limited financing channels in comparison with nonShariah-compliant (NSC) firms, which, in turn, considerably affect the external financing choices of SC firms.…”