Influence of Firm Characteristics on Cash Holdings: Evidence from Indian Iron & Steel Industry

Abstract

Cash holding is an important area of recent debate in corporate finance due to its growing significance in the changing corporate settings. Further, the varying significance of cash holdings across industries is also adding another dynamic to corporate finance literature. Under these backdrops, this paper investigates the influence of firm characteristics on cash holdings in Indian Iron & Steel industry over 2007 -2019. To mitigate the potential endogeneity problem in the data, the study uses dynamic panel regression i.e., Generalized Method of Moments (GMM). The regression result documents that firm characteristics viz cash flow, dividend, assets tangibility, and profitability positively influence the cash holdings while firm size, leverage, net working capital, and R&D expenditure negatively influence cash holdings. However, the influence of growth opportunities is insignificant. Further, the study reveals that leverage, cash flow, and R&D expenditure are the prominent firm characteristics influencing cash holdings in the Iron & Steel industry. This paper adds to the present literature concerning cash holdings by tracing out the firm-level factors affecting cash holdings in the Iron & Steel industry.

Financial condition, working capital policy and profitability: evidence from Indian companies

“…Furthermore, Damodaran (1997) and Sethi and Swain (2019) documented a substantial variation in the level of current assets holdings as a percentage of total assets among the industry class, and such variation emanates from the natural transaction demands for current assets holdings in different lines of business. The difference in the level of WC across the industries also results from the difference in operating risk, the intensity of technological adoption, production process, target customer, etc.…”

“…But longer CCC also attracts many costs like operating and maintenance costs, bankruptcy costs, factoring costs, agency costs, default risks, etc. (Baños-Caballero et al , 2014; Sethi and Swain, 2019). All these costs entice the company to have a shorter CCC.…”