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The financial determinants of corporate cash holdings: Evidence from

some emerging markets

Basil Al-Najjar *

Middlesex University Business School, Middlesex University, London NW4 4BT, United Kingdom

1. Introduction

Ever since Opler, Pinkowitz, Stulz, and Williamson (1999) investigated the determinants of cash holdings, there has been

growing interest in explaining why firms hold cash. In the UK context, Al-Najjar and Belghitar (2011) find that cash

represents, on average, 9% of the total assets. Dittmar and Mahrt-Smith (2007), using US data, find that around 13% of total

assets are cash and near-cash assets. Thus, cash represents a sizeable asset for firms.

The determinants of cash holding deserve investigation because cash holding has costs. Firms might hold cash to meet

future contingencies but meanwhile, they may not invest in profitable projects, with positive NPV. High levels of cash may

therefore indicate agency problems between firms’ management and shareholders ( Jensen, 1986). Another important cost of

holding cash is the opportunity cost if firms are trading off their profitable projects to hold it.

According to Scott (1995), institutional factors are cognitive, normative and regulative structures that may affect firm’sfinancial practices such as cash holdings. One of these factors is the socio-economic factor including laws, and actor’s

attitudes which is considered to be weak in many emerging markets relative to that in developed markets such as the US

(North, 1990, 2005). This is likely to raise the level of uncertainty in transactions and consequently encourage a range of

unproductive practices such as cash retention. Further, slow institutional development (i.e., stock market, bank, and other

financial institutions) may motivate firms to adopt conservative financial practices (North, 2005). On the other hand,

financial globalization driven by the International Financial Institutions has generated a consensus around the need to raise

levels of confidence in transactions in the developing world and a tendency to adopt Anglo-Saxon conventions in this area

International Business Review xxx (2012) xxx–xxx

A R T I C L E I N F O

Article history:

Received 29 April 2011

Received in revised form 2 February 2012

Accepted 17 February 2012

Available online xxx

Keywords:

Brazil

Cash holdings

China

India

Russia

A B S T R A C T

This paper investigates corporate cash holdings in developing countries. In particular, we

look into the effect of capital structure and dividend policy on cash holdings in Brazil,

Russia, India, and Chinaand compareour results with a controlsample from the US andthe

UK. Our sample contains 1992 firms across these countries for the period 2002–2008. We

employ Instrumental Variables analysis to control for the endogeneity of the financial

policies (cash holdings, capital structure, and dividend policy). Our results show some

evidence that capital structure and dividend policy affect cash holdings. There are

similarities between developed and developing countries on the factors determining

corporate cash holdings. The results of our cross-country model provide evidence that

capital structure, dividend policy, and firm size are important factors in determining cash

holdings. Finally, we show that firms operating in countries with low shareholder

protection hold more cash.

2012 Elsevier Ltd. All rights reserved.

* Tel.: +44 2084115342.

E-mail address: [email protected].

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IBR-921; No. of Pages 12

Please cite this article in press as: Al-Najjar, B. The financial determinants of corporate cash holdings:Evidencefrom some

emerging markets. International Business Review (2012), doi:10.1016/j.ibusrev.2012.02.004

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http://dx.doi.org/10.1016/j.ibusrev.2012.02.004

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(Kose et al., 2006). Thus, conflicting tendencies exist: national ‘path dependency’ and in international trend to institutional

homogeneity. In this paper, we examine actual firm practice, which may reflect the influence of institutions in national

settings but may equally be conditioned by global financialization and its institutional drivers.

We contribute to the literature by investigating the financial determinants of corporate cash holdings in developing

countries, namely Brazil, Russia, India, and China, and compare the results with those based on developed markets: the UK

and the US. This allows us to explore corporate cash holdings across countries with different institutional frameworks.

We employ both country specific analysis and static panel data estimations. We control for the endogeneity between

capital structure, dividend policy and cash holdings. We use a different set of factors that can affect cash holdings for anupdated period of time (2002–2008). Consequently, in this paper we shed more light on developing countries and then we

develop a cross-country model to capture the financial determinants of cash holdings. To the best of our knowledge, this

paper is among the first to concentrate on emerging markets (Brazil, Russia, India, and China). To do so, we use a large sample

of 1212 non-financial firms listed in these countries.

The results of our analysis indicate that leverage, dividend payout, liquidity, profitability, and firm size impact cash

holdings. We examine a cross sectional-time series model across the investigated countries and report that there are country

effects on corporate cash holdings decision. The results of the cross-country model show that leverage, dividend payout

ratios, and firm size affect cash holdings.

The remainder of this paper is organized as follows: Section 2 discuses the theoretical framework; Section 3 develops the

hypotheses; Section 4 explains data and methodology; Section 5 highlights the results; Section 6 provides a common model

for cash holdings, Section 7 demonstrates further analysis, and finally Section 8 concludes the study.

2. Corporate cash holdings: theory and empirical base

Here we provide the theoretical ground of cash holdings. In line with the previous literature we discuss the main theories

of cash holdings (see, Opler et al., 1999; Ozkan & Ozkan, 2004). Then, we highlight the findings of the previous empirical

studies.

2.1. Trade-off theory

Trade off theory argues that firms maximize their values by considering the marginal costs and marginal benefits of

holding cash. Under the assumption that managers aim to maximize shareholder wealth, holding cash will bear the ‘‘cost-of-

carry’’. This cost is related to the difference between the earnings from holding cash and the interest that firms will pay to

fund additional cash (see, Dittmar, Mahrt-Smith, & Servaes, 2003). The benefits of holding cash are based on two motives:

transaction minimization and precautionary motives. In relation to the former, it is suggested that firms stockpile cash when

the rising-costs and the opportunity costs (related to cash deficits) are higher (Dittmar et al., 2003; Miller & Orr, 1966; Tobin,1956). The precautionary motive, based on the effect of asymmetric information on raising funds, suggests that even if firms

are able to raise funds from capital markets, they might be reluctant to do so because of market issues (for example if the

market is under-pricing the planned securities to be issued). Ozkan and Ozkan (2004) further argue that firms raise cash

levels to direct more financial resources into such investments when the costs of outside financing are explicitly high. Opler

et al. (1999) ascertain the prevalence of an optimal level of cash where the marginal costs of cash shortage match the

marginal costs of holding cash. Ferreira and Vilela (2004) argue that holding cash serves to reduce the probability of financial

distress due to unexpected losses. Such firms stockpile cash levels as they are in a better position to direct these resources to

investment plans, even if it is hard to obtain funds. Market imperfections are more severe in emerging markets compared to

developed markets as well as bankruptcy related costs are significant in such markets, and hence trade-off theory can

explain cash holding decisions in these markets. For example, the findings of Al-Najjar (2011) and Booth, Aivazian,

Demirguc-Kunt, and Maksimovic (2001) support this argument in emerging market context.

There are different proxies, as financial determinants of cash holdings, used by empirical studies to reflect this theory. For

example, Al-Najjar and Belghitar (2011), following Ozkan and Ozkan (2004) and Opler et al. (1999) empirically investigatethe trade-off theory from cash perspectives by employing leverage, dividend policy, firm size, risk, and asset liquidity. In the

same vein, but using EMU data, Ferreira and Vilela (2004) also use liquidity, leverage, growth and size to empirically inspect

this theory. We shed more light on the empirical evidence and our financial factors in Sections 2.3 and 3 below.

2.2. The pecking order theory

This theory suggests that there is no optimal level of cash holdings for a firm. Based on asymmetric information, Myers

(1984) and Myers and Majluf (1984) suggest that firms follow a pecking order of financing to minimize costs related to

information asymmetry. The order starts with internal sources and firms will use external sources, after the internal sources

are exhausted. Myers (1984) proposes that firms favourexternal funding by debt compared to equity issuance, since debt has

lower information costs than equity financing. Cash can be seen as an outcome of the different financing and investment

decisions proposed by the hierarchal pattern of financing (Dittmar et al., 2003). Ferreira and Vilela (2004) claim that cash can

be used for financing investments to pay firm’s debt and in turn stockpile cash. Dittmar et al. (2003) also detect that firmswith high level of cash flows are those to distribute dividends, apply for debt financing, and as a result hoard cash. Based on

B. Al-Najjar/ International Business Review xxx (2012) xxx–xxx2

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Please cite this article in press as:Al-Najjar, B. Thefinancial determinantsof corporate cash holdings:Evidence from some






the previous literature we argue that information asymmetry is also important, and might be more severe in developing

countries (see among others, Al-Najjar, 2011; Booth et al., 2001).

Different financial factors, as determinants of cash holdings, have been used by empirical studies to reflect this theory.

Recently, Al-Najjar and Belghitar (2011) employ leverage and profitability as financial variables that determine the decision

to hold cash. In addition, Ferreira and Vilela (2004) use size and cash flow to empirically analyse this theory. We discuss the

determinants of cash holdings and the empirical evidence, in more details, in Sections 3 and 2.3 below.

To recap, there is no preference in the finance literature, about the best theory that can explain the determinants of cash

holdings and thus there is no optimal set of factors that determine the decision to hoard cash. Hence, the aim of our researchis to empirically test which variables determine cash holdings for our sample of emerging countries.

2.3. Empirical evidence

Numerous studies have focused on cash holdings. These include Opler et al. (1999) using US data; Dittmar et al. (2003)

using an international sample of 45 countries; Ozkan and Ozkan (2004) and Al-Najjar and Belghitar (2011) in the UK setting;

Dittmar and Mahrt-Smith (2007) in the US; Ferreira and Vilela (2004) within an EMU context; Garcia-Teruel and Martinez-

Solano (2008) using Spanish SMEs data; Ramirez and Tadesse (2009) using international data. These papers consider

developed countries, with two exceptions who use international data (Dittmar et al., 2003; Ramirez & Tadesse, 2009).

Dittmar et al. (2003) include Brazil and India but not China or Russia in their sample, and their main interest has been to

examine the international corporate governance impact on cash holdings. Ramirez and Tadesse (2009) aim to develop a cross

sectional-times series model across 49 countries to investigate the extent to which ‘culture’ impacts cash holdings. They

operationalize culture through the ‘uncertainty avoidance’ concept which seems likely to capture elements of theorganisational/institutional setting as well as fundamental social attitudes. They find that this uncertainty avoidance

variable has a significant impact on the cross country variations of holding cash. However, Ramirez and Tadesse did not take

dividend policy into account in their models.

In addition to the determinants of cash holdings, other researchers have investigated the link between cash holdings and

firm value. For example, Martinez-Sola, Garcia-Teruel, and Martinez-Sola (2010) use US data and show that there is a

concave relationship between cash holdings and firm value. In a similar vein, Tong (2009) finds that cash value is lower in

diversified than in non-diversified firms. Pinkowitz, Stulz, and Williamson (2006) detect a weak relationship between cash

holdings and firm value in countries that suffer from lower investor protection compared with countries with stronger

protection.

Foley, Hartzell, Titman, and Twite (2007), using a sample of US multinational firms, examine the importance of holding

high cash levels in a taxation context. Their results demonstrate that firms with high levels of repatriation tax increase

their cash reserves. Guney, Ozkan, and Ozkan (2003) examine cash holdings in different countries including Japan, France,

Germany, and the US. They show that firms with strong shareholder protection are in a better position to hold lowerlevels of cash. They point out a negative relationship between ownership concentration and cash holdings. Yet, there is

limited evidence of corporate cash holdings in relation to developing countries. We aim to bridge this gap in the

literature.

3. The determinants of cash holdings: hypotheses development

Firm value is not related to firm’s financial decisions in the world of no market imperfections ( Stiglitz, 1974), which can

explain the reason why cash holdings can be irrelevance to firm value (see, Opler et al., 1999). However, these imperfections

do exist and are more relevant to emerging markets.Accordingly, we suggest that the theoretical underpinnings determining

cash holdings in developed markets will also apply to the emerging market context.

In this part of the study, we introduce our hypotheses. We start with leverage, then dividend policy and move afterwards

to the other financial factors included in this study. In addition, we discuss the shareholder protection as a determinant of

cash holdings in Section 7.

3.1. Leverage

Leveraged firms are more likely to hoard cash due to the higher probability of financial distress. It is suggested that cash

levels decrease with more debt (Baskin, 1987). Accordingly, firms with more liquid assets can covert these assets to cash and

in turn hold lower levels of cash (Al-Najjar & Belghitar, 2011; Ozkan & Ozkan, 2004). Opler et al. (1999), Ozkan and Ozkan

(2004), and Al-Najjar and Belghitar (2011) argue for a negative link between leverage and cash holdings. We suggest that

bankruptcy related costs in emerging markets are also important, since different studies in the emerging market literature

find evidence for these costs (Al-Najjar, 2011; Booth et al., 2001). In a similar vein but supporting the monitoring role of

financial institutions, Ferreira and Vilela (2004) suggest that firms with high level of debt are less able to stockpile cash. This

is because they are better monitored if compared to firms with relatively low debt. Hence, based on the previous empirical

findings and the trade off theory, our first hypothesis is:

H1. There is a negative association between leverage and cash holdings.

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3.2. Dividend payments

Based on the trade off theory, the association between dividend payments and cash should be negative, since ‘‘dividend-

paying firms’’ can trade off the costs of holding cash by reducing dividend payments. In other words, firms that distribute

dividends to their shareholders are more able to raise funds at lower costs when needed by reducing their dividend

payments (Al-Najjar & Belghitar, 2011). Similarly, Ozkan and Ozkan (2004:2106) argue that these costs can be avoided for

firms facinglow internal financing resources by issuing equity or even reducing payment of dividends. They state that: ‘‘firms

that currently pay dividends can afford to hold less cash as they are more capable of raising funds when needed by cutting dividends’’ . Opler et al. (1999:8) also support this negative relationship: ‘‘If the firm has a shortage of liquid assets, it can cope

with the shortage by either decreasing investment or dividends, or by raising outside funds through security issuances or asset

sales’’ . Based on the previous empirical findings and the trade-off theory, we hypothesize that:

H2. There is a negative association between dividends and cash holdings.

3.3. Profitability

Based on the hierarchal pattern of financing, cash is an outcome of the financing and investment activities (Dittmar et al.,

2003). Accordingly, profitable firms are more able to pay dividends, pay their debt obligations, and stockpile cash. Less

profitable firms will hold less cash and issue debt to finance their projects. These firms will be reluctant to issue equity

because of thehigh related costs of such issuance (Al-Najjar & Belghitar, 2011; Dittmar et al., 2003; Ferreira & Vilela, 2004).In

the same vein, Dittmar et al. (2003:116) argue that ‘‘firms with low cash flows draw down their cash and issue debt to financeinvestment, but they refrain from issuing equity because it is too costly’’ . Hence, there is a positive association between firm’s

profitability and cash holdings. Based on the empirical findings and pecking order theory, we hypothesize that:

H3. There is a positive association between profitability and cash holdings.

3.4. Liquidity

It is expected that thecosts to convert liquidassets to cash are much lower than other assets. Thus, Firms with more liquid

assets can covert these assets to cash and in turn are less likely to hoard cash. The existence of liquid assets will lead firms to

be less reliable on capital markets to obtain cash. Ferreira and Vilela (2004), based on trade off theory, argue that in the event

of cash shortfall, liquid assets can be easily liquidated and hence they are substitutes for cash. Based on trade-off theory, we

argue for a negative relationshipbetween liquidity and cash holdings (Al-Najjar & Belghitar, 2011; Ozkan & Ozkan,2004) and

hypothesize that:

H4. There is a negative association between asset liquidity and cash holdings.

3.5. Firm size

Small firms are found to hold more cash than their large counterparts because of the high costs of external funds. Large

firms are considered to be more diversified than their small counterparts and in turn less prone to bankruptcy related costs

(Al-Najjar & Belghitar, 2011) and hence less likely to stockpile cash reserves. Equally it could be argued that large firms have

less information asymmetry (if compared to small firms), and so their managers have better flexibility in financial policies

and in turn such firms will hold more cash. In a similar vein, Ozkan and Ozkan (2004) argue that if firm size is a proxy for

information asymmetry, which reflects the external financing costs, then a negative relationship with cash holdings should

be expected. However, if firm size is seen as an index for financial distress, then small firms are more likely to be liquidated if

they suffer from financial distress. Hence, such firms hold more cash to avoid such distress situation (Ozkan & Ozkan, 2004).

Accordingly, we argue that firm size is an important determinant of cash holdings and do not predict the sign of theassociation between firm size and cash holdings:

H5. There is a negative/positive association between firm size and cash holdings.

4. Data and methodology

In this section, we start with the importance of our sample; we then offer a description of our data, and finally the

econometric model is outlined.

4.1. Sample overview

Our sample is emerging markets, namely, Brazil, Russia, India, and China. We select this sample for different reasons. On

the macro-economic level, these countries are fast growing economies. They have high foreign direct investment and othermultilateral opportunities (HermanMiller, 2010; PriceWaterHouseCoopers, 2010).


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In a recent IMF working paper, Samake and Yang (2011) argue that Brazil, Russia, India, and China (BRIC) have always

been considered as key players in the international trade and the global economy. The main reason for such key role is their

recorded ‘‘rapid economic growth’’ in the recent decades. Samake and Yang argue that the role of these countries in world

economy is based on three aspects.

Firstly, population: the population of the world is around seven billion inhabitants, with three out of seven live in these

countries. This shows the significant contribution of Brazil, Russia, India, and China in the human resource base. Secondly,

growth: thesecountries also have anotherkey contribution to the worldeconomyas theirGDP represents the third after the US

and the Euro Area. The IMF expects that their GDP will outperform the Euro Area before 2015. Finally, trade: the share of theworld exports for these countries have almost tripled over the last two decades, outperforming the US and are getting closer to

the Euro Area. From imports point of view, their share has doubled and will soon reach to the US level. Accordingly, these

countries have strong integration with the world economy and they are playing a significant role in the world trade and the

financial ties, especially with low income countries (Samake & Yang, 2011). In the same vein, Wilson and Purushothaman

(2003) argue thatthe roleof these countries willbe more significant since they are seenas thenew demandand spending power

which will compensate the slow expectedgrowth of the more developed countries and thus attracting the multinational firms

to invest in them. This is because these countries have the potential to create new multinational firms (Fan, 2008). Enderwick

(2009) argues that such emerging markets have a significantshare in the world economy that qualify them to catch up thesales

level of the developed economies at lower costs and risks, and thus suppliers are encouraged to invest in them.

From the corporate governance point of view, there is a significant degree of confidence in the corporate governance and

financial reporting in these countries. The Financial Standard Foundation indicates that Brazil, India, Russia are ‘‘enacted’’

and China has ‘‘intent declared’’ in terms of international governance practice standards. From a financial auditing point of

view, all the countries have ‘‘intent declared’’ with the International Standards of Auditing (ISA). This shows that financialreports are clean and investors (banks) can rely on the provided information.Finally, the banking systemis seen to followthe

international standards for all the countries, with only Brazil as an exception. This gives an indication of banks’ liquidity and

lending procedures in the investigated countries (EstandardsFORUM, 2011).

Nevertheless, these countries provide us with very different institutional settings. For example, most listed Chinese firms

are state owned; this might have an impact on financial decisions and the accessibility of external funds. India has liberalized

capital markets, with improved shareholder and creditor rights and high levels of foreign influence in its stock market (Estrin

& Prevezer, 2011), and hence better conditions for firms to access the capital market. In Russia, the introduction of the

bankruptcy law in 1998 and 2000 provides more transparency and hence lower information opacity. Brazil has good

compliance with the international good corporate governance standards that might affect firms’ financial decisions (Estrin &

Prevezer, 2011). The Bertelsmann Status index for these countries places Brazil and India in the advanced group of countries

and Russia (China) in the limited (very limited) group (Bertelsmann, 2010). The extent to which the rule of law is observed in

these countries also varies considerably. The Bertelsmann rule of law index indicates that Brazil and India have relatively

high scores (7.8 and 7.5, respectively) and that Russia and China are significantly below these levels (4.3 and 2.3,respectively) (Bertelsmann, 2010). Appendix 1, provides summary statistics the shows the importance of these countries in

the world economy.

This discussion confirms the importance of our investigated emerging markets in terms of their macro level impact in the

world economy and their rich and diversified institutional environments. This also feeds into the significance of our main

aim to investigate if the financial determinants of cash holdings, which are found important in developed markets, will hold

in our sample of emerging markets.

4.2. Data

We use DataStream to create the sample based on market capitalization, which consists of 83 firms from Brazil, 93 firms

from Russia, 542 firms from India, and 494 in China. These firms are non-financial. The selection criterion is based on data

availability for non-financial firms in DataStream across the period 2002–2008. We allow firms to freely enter and exit the

market to avoid any survivorship bias in our analysis. Then we compare the results of our main sample with non-financialfirms from the US and the UK, by analyzing a random sample of 576 US firms and 204 firms from the UK. Accordingly, the

overall sample is 1992 firms for the period 2002–2008.

The descriptive statistics, reported in Table 1, show that firms in our sample hold low level of cash, as it represents around

5% of the total assets in Russia, 3.5% in China, 3% in India, and 2% in Brazil, compared to 10%, and 8% for the US and the UK,

respectively. If we compare our results with previous studies, we find that average cash holdings in the UK reported by Al-

Najjar and Belghitar (2011) is 9%, which is similar to our findings for the UK context. Dittmar et al. (2003) report cash

holdings as follows: Brazil is 7%; India is 3%; the UK is 8%, and in the US is 6%. Ramirez and Tadesse (2009) detect that the

average cash holdings in Brazil, Russia, India and China are: 9%, 7%, 6%, and 18%, respectively. This difference might be due to

the different sample size and the different investigated period. On average, all firms across the countries enjoy good financial

performance with profitability more than 80%. On average,leverage is between 20% and 30% across our main sample and 17–

20% in the US and the UK. This indicates an almost similar debt pattern (capital structure) in both developing and developed

countries in our sample. Similar findings are reported for liquidity, dividend payout, and firm size.

Overall, companies in Russia hold the highest amounts of cash, rely less on debt and pay low dividends. While firms inIndia, hold relatively high cash, rely on debt and pay high dividends. The case of Chinese firms is different, as they hold cash,


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rely less on debt and pay high dividends. Finally, Brazilian firms hold the lowest level of cash, rely heavily on debt and pay

relatively high dividends.

Table 2 shows the correlation matrix in which we notice that there are no high correlations among the variables across

our sample of countries, in each country and the entire countries, and hence multicolinearity is not a concern, which is

confirmed by an average VIF of 1.20 across the models.

4.3. Methodology

In order to investigate our hypotheses, we apply different methods, including cross-sectional-time series analysis of the

determinants of cash holdings for each country investigated. Then, we test if there is a country effect in determining thedecision to hold cash. We subsequently run a time series-cross sectional analysis for the entire sample. The following model

is used for the first stage of our analysis:

CASH it ¼ b0 þ b1LEV it þ b2DPOit þ b3ROE it þ b4LIQ it þ b5SIZE it þ eit

where CASH is the cash ratio measured by cash and cash equivalents to total assets ratio; LEV is the leverage ratio,

measured by total debt to total assets; DPO is the dividend payout ratio measured by dividends per share divided by

earnings per share; ROE is the return on equity ratio measured by net income divided by owners equity; LIQ is the

liquidity ratio measured by the most liquid assets to current liabilities; SIZE is the natural logarithm of total assets; e is

the error term.

For our second stage we investigate the country effect in the cash holdings model, by estimating the following model:

CASH it ¼ b0

þ hSDit þ eit

where Dit is a vector of dummy variables representing each investigated country. In so doing,we adopt the approach of Booth

et al. (2001) who examine the capital structure decision across developing countries (for more discussion, see Section 5).

Finally, we use the following model in the third stage of our analysis:

CASH it ¼ b0 þ b1LEV it þ b2DPOit þ b3ROE it þ b4LIQ it þ b5SIZE it þ hX

Dit þ eit

The variables have the same definitions as above; this model represents the cross sectional time series model to capture

the country effects into the model. These models might suffer from endogeneity between the dependent variable and the

financial policies, capital structure and dividend policy.1 As a result, we apply Instrumental Variables (IV) analysis. We use

asset tangibility and free cash flows as instruments in our models. Finally, we add year dummies and re-estimate the models

Table 1

(a) Descriptive statistics and (b) descriptive statistics: whole sample.

Country No. of firms Cash Leverage DPO Profitability Liquidity Size

(a)

Brazil 83 0.022 0.312 22.571 0.819 1.028 14.496

Russia 93 0.048 0.218 15.730 0.857 1.020 17.345

India 542 0.033 0.308 17.785 0.831 1.035 15.155

China 494 0.034 0.273 25.532 0.787 1.031 14.045

UK 204 0.101 0.231 31.386 0.810 1.026 13.151US 576 0.078 0.176 12.486 0.818 1.075 13.494

Total 1992

Variables Obs Mean Min Max

(b)

Cash 11,692 0.056 0 1

Leverage 11,766 0.242 0 6.900

DPO 10,638 0.195 0 1

Profitability 11,780 0.813 0 1.439

Liquidity 11,647 1.045 0.244 16.443

Size 11,743 14.137 0 21.981

Note: Cash is cash ratio measured by cash to total assetsratio; Levis leverage ratio,measuredby total debt to total assetsratio; DPOis dividend payoutratio

measured by dividend per share divided by earning per share; ROE is return on equity ratio measured by net income divided by owners equity; LIQ is

liquidityratio measured bymost liquidassets (net of cash) tocurrent liabilityratio;Size isthe natural logarithmof totalassets;Leverageis total debt to total

assets ratio; DOP is dividend per share dividend by earning per share.Note: Panel (a) shows the approximate average from the investigated variables in each country.

1

We use Hausman test for theendogeneity issue, theresults show that there is some evidence of endogeneity in our models, and hence we report theIVanalysis to control for it.


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to control for the trends and other un-included confounding effects. However, for parsimony we do not report the time

coefficients in the tables. The standard errors are clustered to capture group effects in each country.

To sum up, we introduce a static cross sectional-time series IV analysis to investigate the financial determinants

of cash holdings using firms from emerging markets, and then comparing the results with firms from the US and

the UK.

5. Regression results

Table 3 presents the results of the regression models; there are two models for each country. The first model is withoutyear dummies and the second model is with them. To recap, the models are cross-sectional time series models to capture

Table 2

Correlation matrix.

Leverage DPO Profitability Liquidity Size Cash

Panel A: Brazil

Leverage 1 0.081 0.008 0.439 0.144 0.018

DPO 1 0.336 0.105 0.301 0.117

Profitability 1 0.019 0.479 0.037

Liquidity 1 0.198 0.167

Size 1 0.01Cash 1

Panel B: Russia

Leverage 1 0.116 0.058 0.492 0.037 0.179

DPO 1 0.177 0.091 0.192 0.013

Profitability 1 0.091 0.29 0.02

Liquidity 1 0.157 0.173

Size 1 0.16

Cash 1

Panel C: India

Leverage 1 0.193 0.065 0.258 0.081 0.111

DPO 1 0.043 0.054 0.149 0.006


Liquidity 1 0.271 0.264

Size 1 0.118

Cash 1

Panel D: China

Leverage 1 0.189 0.003 0.161 0.155 0.138

DPO 1 0.137 0.041 0.105 0.057

Profitability 1 0.058 0.202 0.003

Liquidity 1 0.01 0.102

Size 1 0.194

Cash 1

Panel E: UK

Leverage 1 0.068 0.078 0.406 0.27 0.327

DPO 1 0.098 0.236 0.097 0.122


Liquidity 1 0.46 0.415

Size 1 0.371

Cash 1

Panel F: US

Leverage 1 0.127 0.04 0.378 0.24 0.28

DPO 1 0.182 0.258 0.391 0.159


Liquidity 1 0.519 0.389

Size 1 0.294

Cash 1

Panel G: whole sample

Leverage 1 0.024 0.007 0.17 0.17 0.238

DPO 1 0.092 0.04 0.167 0.075

Profitability 1 0.009 0.319 0.053

Liquidity 1 0.121 0.149

Size 1 0.232

Cash 1

Note: Variables are defined in Table 1.


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firm-specific characteristics and the IV analysis is used dependingon 2SLS procedure. We discuss the results for each country

below.

In relation to Brazil, we report inconclusive evidence for the determinants of cash holdings. The results show that there is

a negative relationship between profitability and cash holdings. This result contradicts the expected positive sign from

pecking order theory and H3. We find a positive relationship between the dividend payout ratio and cash holdings, which

contradicts trade-off theory expectations and H2. This might indicate that less profitable firms that are able to pay dividends

‘‘to keep thereputation of payingdividends’’ are notable to obtain extra funds from external sources such as banks and hence

hold cash for any contingencies to improve their financial positions. Leverage, firm size and liquidity are not found to be

significant determinants of cash holdings in the Brazilian case.

Regarding Indian firms, the results are consistent with those predicted by financial theory. Consistent with H1, we reporta negative relationship between leverage and cash holdings. Thus, leverage can be viewed as a substitute for holding cash;

equally firms with the ability to access external funds are less in need of cash to pay for investments. In line with H4 a

negative relationship is found between asset liquidity and cash holdings, and thus firms with more liquid assets can convert

these assets to cash and in turn have less need to hold cash (Al-Najjar & Belghitar, 2011; Dittmar et al., 2003). We detect a

negative relationship between firm size and cash holdings, and therefore small firms are less able to obtain external funds

and are more in need of holding cash. This result is in line with trade-off theory and H5. Finally, we could not find support for

the relationship between cash holdings, on one hand, and dividend payout ratio and profitability, on the other.

The Chinese perspective shows that leverage, size, and profitability are the main determinants of cash holdings.

Consistent with theoretical expectations and H1, we detect a negative relationship between leverage and cash holdings:

Chinese firms that are more able to obtain debt are less likely to hold cash as they are able to obtain funds externally.

Consistent with pecking order theory and H5, we report a positive relationship between firm size and cash holdings and

hence large Chinese firms are more diversified and have an increased need to hold cash. Limited evidence is found for the

relationship between profitability and cash holdings, with a negative sign contradicting the positive expected sign bypecking order theory and H3. Finally, there is no evidence of the impact of dividend payouts and liquidity on cash holdings.

The Russian case shows that leverage, dividend payout ratio, and profitability determine cash holdings. In line with H1, a

negative relationship is found between leverage and cash holdings. In addition, consistent with H2, a negative relationship is

found between dividend payouts and cash holdings. Russian firms that are able to access capital markets have less need to

hold cash. In line with pecking order theory and H3, a positive relationship is reported between profitability and cash

holdings. This indicates that profitable firms are more able to pay dividends and accumulate cash holdings ( Al-Najjar &

Belghitar, 2011). Finally, no evidence is reported for the impact of firm size and liquidity on cash holdings in Russia.

The results of our controlled samples from the UK and the US show almost similar results to those reported for our sample

of emerging countries, especially in the case of the UK. We find that leverage, dividend, and liquidity are the determinants of

cash holdings with the expected signs. However, in the case of our US sample we report contradictory signs for dividends,

profitability, and liquidity.

After we control for year fixed effects, we confirm the previous results across the investigated countries. In particular,

leverage, dividend payout ratio, profitability, firm size, and liquidity are important drivers of cash holdings in our mainsample.

Table 3

IV country specific analysis.

Leverage DPO Profitability Liquidity Size Constant Observations

Brazil 0.051 (0.445) 0.001 (0.128) 0.108* (0.086) 0.034 (0.804) 0.002 (0. 447) 0.055 (0.781) 361

Brazil

(year-dummies)

0.057 (0.349) 0.001* (0.068) 0.105** (0.049) 0.060 (0.584) 0.001 (0. 489) 0.010 (0.947) 361

Russia 0.358** (0.020) 0.006** (0.002) 0.384** (0.010) 0. 172 (0.566 ) 0.003 (0. 586) 0.007 (0.981) 323

Russia

(year dummies)

0.368** (0.020) 0.006** (0.002) 0.404** (0.010) 0.191 (0.529) 0.004 (0.517) 0.007 (0.981) 323

India 0.363** (0.001) 0.002 (0.217) 0.014 (0.713) 0.371* (0.058) 0.009** (0.005) 0.705** (0.015) 2105

India

(year dummies)

0.369** (0.002) 0.002 (0.300) 0.016 (0.680) 0.384* (0.065) 0.009** (0.010) 0.712** (0.018) 2105

China 0.547** (0.027) 0.004* (0.099) 0.577** (0.043) 0.024 (0.697) 0.030*** (0.000) 0.102 (0.480) 803

China

(year dummies)

0.400** (0.001) 0.001 (0.393) 0.157* (0.102) 0.012 (0.697) 0.009** (0.001) 0.239** (0.014) 803

UK 1.457*** (0.000) 0.005* (0.069) 0.287 (0.159) 1.128** (0.044) 0.003 (0. 997) 1.47 4** (0.012) 917

UK

(year dummies)

1.549*** (0.000) 0.005* (0.060) 0.330 (0.139) 1.255** (0.039) 0.0047 (0.994) 1.632** (0.011) 917

US 0.023*** (0.000) 0.516*** (0.000) 0.201*** (0.000) 0.249*** (0.000) 0.321** (0.009) 3581

US

(year dummies)

0.024*** (0.000) 0.517*** (0.000) 0.201*** (0.000) 0.246*** (0.000) 0.342** (0.006) 3581

Note: Variables are defined in Table 1; standard errors are corrected for heteroscedasticity.

* Significant at 10% level.

** Significant at 5% level.*** Significant at 1% level.


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Overall, the financial factors that affect cash holdings in developing countries are similar to those that affect cash holdings

in developed countries: leverage, dividend payout, profitability, asset liquidity, and firm size.

6. A common model for cash holdings across developed and developing countries

Our results reported in Table 3 show, to some extent, that our sample of emerging countries shares the same

determinants of cash holdings as suggested by the developed markets. However, some variables change in signs or

significance across the countries. There are different reasons behind these differences: for example, the number of firmsvaries across the countries, as well as different institutional settings. Similar findings are reported by Booth et al. (2001). We

follow the approach of Booth et al. and run the regression of cash holdings against the dummy variables that represent the

countries. We exclude the dummy for the UK and keep the US in our sample to maximize the number of observations. This

model represents the hypothesis that if we know the nationality of the firms, we can know the determinants of cash

holdings. Then, the model will be compared with the cross sectional-time series model for all the countries.

Table 4 shows the results for the country dummies, we report two models one with year dummies and the other without

them. It can be seen from Table 4 that all the dummies are highly significant. Around 8% of the variation of the dependent

variable can be explained by knowing the firms’ nationality. This finding indicates that cash holding decisions are related to

different industrial and firm-specific factors (such as dividend decisions). Therefore, the inclusion of the firm-specific

variables will result in lower effect of country-dummies. Equally, it can be argued that the results of these differences are

related to structural or institutional aspects, including the ability to access financial institutions’ funds or to access the

capital market. In this case the financial factors should vary andremain significant. Finally, these differences can be related to

missing information or wrong sampling (see for example, Booth et al., 2001).In our final stage, we estimate two models, one with dummy-variables and the other with year and country dummies. We

use the IV model with the 2SLS approach to estimate our cross sectional-times series models. The resultsare reportedin Table 5.

The results of the cross sectional-times series model show that leverage is negatively related to cash holdings. This result

is consistent with the reported findings in our country specific models, suggesting that firms with more ability to obtain debt

Table 5

Cross section time series regressions.

Model 1 Model 2

Leverage 0.595** (0.003) 0.592** (0.002)

DPO 0.006*** (0.000) 0.0061*** (0.000)Profitability 0.066 (0.190) 0.072 (0.130)

Liquidity 0.126 (0.594) 0.119 (0.611)

Size 0.010* (0.061) 0.0098* (0.060)

Brazil 0.023 (0.511) 0.0229 (0.512)

Russia 0.133*** (0.000) 0.130*** (0.000)

India 0.0687** (0.008) 0.065** (0.010)

China 0.027 (0.397) 0.021 (0.497)

US 0.108*** (0.000) 0.1072*** (0.000)

Constant 0.318 (0.247) 0.298 (0.270)

Year dummies No Yes

Observations 17383 17383

Note: Variablesare definedin Table 1, Models1 and2 are cross sectional-timesseries regressions;Models 3 and4 areregressed using 2SLS. Standard errors

are corrected for heteroscedasticity.

* Significant at 10% level.


Table 4

Regression with country dummies.

Model 1 Model 2

Brazil 0.089*** (0.000) 0.089*** (0.000)

Russia 0.063*** (0.000) 0.062*** (0.000)

India 0.077*** (0.000) 0.076*** (0.000)

China 0.076*** (0.000) 0.076*** (0.000)

US 0.032***

(0.000) 0.0322***

(0.000)Constant 0.110*** (0.000) 0.105*** (0.000)

Year dummies No Yes

Observations 23041 23041

R2 0.083 0.085

Note: Variables are defined in Table 1; standard errors are corrected for heteroscedasticity.

*** Significant at 1% level.


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financing, are less in need of holding cash. This result is in line with Baskin (1987), Kim, Mauer, and Sherman (1998), and Al-

Najjar and Belghitar (2011). In addition, a negative relationship is found between dividend payout ratio and cash holdings.

Thus, the greater the ability to access capital markets, the less the need to hold cash. This result is consistent with Ozkan and

Ozkan (2004), Ferreira and Vilela (2004), and Al-Najjar and Belghitar (2011). Moreover, we detect a positive relationship

between firm size and cash holdings and hence large firms are more able to diversify their opportunities and are more in

need to hoard cash. Finally, we could not find any support for the impact of profitability and asset liquidity on cash holdings.

These results are not significantly different from those reported in Table 3.

The country dummy-variables have dropped in their significance as only three out of 5 dummies are statisticallysignificant. The models exclude the dummy variable for the UK. Accordingly, we suggest that the results of the cross

sectional-times series model support the argument that the differences in decisions on holding cash are related to

institutional and firm-specific factors.

When we control for year dummies, we report similar results to those reported in Model 1, and thus we argue that firm

specific factors are important in determining cash holdings. More specifically, leverage, dividend payout ratios and firm size

affect the cash holding decision.

7. Further analysis

Our findings show a cross-country effect. To shed more light on this issue, we investigate in more details the

institutional settings of our main sample. To do so, the study includes two variables to measure the impact of

shareholder right and the legal system in emerging market context. Here, the theoretical base is the agency cost view of

cash holdings.The agency relationship is a result of the separation between management and ownership of the firm. There are some

advantages of this separation, including the ability of ownership to change without impacting operations, and the possibility

of hiring experts to act as managers ( Jensen & Meckling, 1976). However, managers might have their own objectives distinct

from those of shareholders, and hence agency problems exist between the agents (managers) and principals (shareholders).

Jensen and Meckling (1976) define the agency relationship as a contract whereby owners delegate managers to act on their

behalf. Jensen (1986) argues that firms accumulate free cash flows since managers can control this cash. Managers can hold

cash to minimize the likelihood of financial distress, and use cash to invest in projects that might not be in the interest of

shareholders (see for example, Shleifer & Vishny, 1997). From the agency costs perspective, managers that are less concerned

to meet shareholders expectations are those who are willing to hold more cash and invest in unprofitable projects (negative

NPV). In order to investigate agency theory, we adopt Dittmar et al.’s (2003) approach, in which they argue that shareholders

in a good legal protection environment can force management to reduce cash levels. Hence, we investigate how legal

protection will affect cash holdings across countries. Another possible explanation for this relationship is that firms

operating in low shareholder protection hoard cash since capital markets are not highly developed and firms find suchmarkets difficult to approach. Hence, we hypothesize that:

H6. There is a negative relationship between shareholder protection and cash holdings.

To test H6, we run the following model:

CASH it ¼ b0 þ b1SHARERIGHT þ b2DPOit þ b3LEV it þ b4ROE it þ b5LIQ it þ b6SIZE it þ eit

where, SHARERIGHT is a dummy variable that takes one if the country is considered to have high shareholder right, and zero

otherwise. We replace thevariable with COMMON which is a dummy variable to reflect thecommon lawin ourmain sample.

Table 6

The effect of shareholder right.

Model 1 Model 2 Model 3

Shareright 0.004*** (0.007) 0.004** (0.016)

Common 0.0019 (0.317)

Leverage 0.033*** (0.003) 0.033*** (0.000)

DPO 0.0004*** (0.248) 0.0004 (0.248)

Profitability 0.026 (0.150) 0.029 (0.218)

Liquidity 0.027 (0.289) 0.0274 (0.249)

Size 0.0098**** (0.0000) 0.030*** (0.000)

Constant 0.0361*** (0.000) 0.006 (0.570) 0.007 (0.570)

R2 0.001 0.03 0.03

Observations 6480 6480 5913

Note: Variablesare definedin Table 1, Models1 and2 useshareholderright dummy to capture thehigh share holderright countries; Model 4 uses common

law dummy to capture the common law country are regressed, the simple regression model for the common law model is not reported because it was not

significant, the coefficient of interest is 0.0011. Standard errors are corrected for heteroscedasticity.



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Shareholder right dummy, takes the value of one if firms are listed in Brazil and India ( Dittmar et al., 2003), and zero

otherwise. The common law dummy is for firms listed in India, since it is the only common law country in our main sample.

We expect the coefficients of these variables to be negative and significant.

Table 6 shows three models. The coefficients of our main variable in the first two models are negative and statistically

significant. This is consistent with our expectation and the findings of Dittmar et al.(2003). When we replace the shareholder

right variable by the common law variable, the sign of the coefficient is consistent with our expectations but is not

statistically significant. Hence, we support H6 and confirm that, in the emerging market context, firms operating in countries

with less shareholder protection hold more cash. Another notable result is that the other financial variables have dropped intheir significance, indicating that cash holdings can be seen as an outcome of weak shareholder protection compared to the

other investigated financial determinants.

8. Summary and conclusions

In this study, we investigate cash holdings in emerging markets that are different in governance and institutional

framework from the US and the UK. When we combine both country and cross-country analyses about cash holdings, we

gain more understanding about the debate of why firms hold cash. Furthermore, investigating this debate in emerging

markets emphasizes the importance of the strategic decisionof holding cash, which has been under-researched or partially

explored in the previous literature. Accordingly, our main aim in this study is to provide new evidence on the financial

determinantsof cashholdings in emerging markets. The sample includes non-financial firmsfrom Brazil, Russia, India, and

China, which represent the biggest emerging markets as they are among the top 20 countries in terms of the GDP. Our

results provide further insights into the decision of holding cash from international context. We detect that for bothdeveloped and emerging market firms, leverage, dividend payout, liquidity, profitability, and firm size impact cash

holdings.

It is worth noting that these results might be subject of scepticisms, since some of the independent variables have

changed in significance across the countries, and some have an overall low impact. This is expected because these countries

have different institutional settings. Booth et al. (2001) reach to a similar result when they investigate capital structure in

developing countries. Booth et al. (2001) and Aivazian and Booth (2003) use India in their sample. Dittmar et al. (2003)

examine Brazil, as well as India, and Ramirez and Tadesse (2009) use Brazil, Russia, India, and China in their sample when

they investigate cash holdings. Their results show some evidence that financial theory is applicable in international contexts.

Hence,our results arecomparable to those reported in theprevious literature andprovide further insights about the financial

determinants of cash holdings across countries.

We adopt a uniform model for developed and developing countries to capture the impact of firm-driven factors. The cross

sectional-time series model shows that the investigated financial factors affect cash holdings. In particular, leverage,

dividends and firm size are found to be important financial determinants of cash holdings. The industrial and institutionalsettings are the main reasons behind the differences in cash holding decisions across our sample. In order to further

investigate this issue, we run additional analysis and provide supporting evidence that, from emerging markets context,

firms operating in countries with low shareholder protection hold more cash. One reason is that such countries have weak

capital markets for firms to approach for funding.

Overall, we provide further evidence that trade-off theory, pecking order theory and agency cost theory play important

roles in understanding financial decisions such as cash holdings in developing countries. Our results show that the factors

determining cash holdings in both emerging markets and more developed countries are largely similar. In particular,

leverage, dividend payout, profitability, asset liquidity, and firm size have an impact on cash holdings.

In general, from international perspective, this study has an important implication since it shows that even if emerging

markets differ in financial and governance structures yet they share the same financial determinants. Hence, firms in such

countries follow almost similar patterns in managing their cash holdings.

There is still room for further discussion about corporate cash holdings in developing countries by investigating the

internal corporate governance factors that might impact financial decisions. Board characteristics, audit features, and CEOcharacteristics all require investigation.

Appendix A

Descriptive statistic of Brazil, Russia, India, and China for 2010.

Country GDP (US$) Exports

%of GDP

Imports %

of GDP

Inflation Corruption

Index

Governance International

Standards of Audit

Civil/Common Law

Brazil 2,087,890 10% 11% 7.5% 3.7 Enacted Intent declared Civil

Russia 1,479,819 29% 20% 11.4% 2.1 Enacted Intent declared Civil

India 1,729,010 18% 25% 9.6% 3.3 Enacted Intent declared Common

China 5,878,629 29% 25% 5.8% 3.5 Intent declared Intent declared Civil

Note: The information about GDP, exports, and imports are from the World Bank statistics; Governance is the extent to which the country follows the

international corporate governance standards and International standard of auditreflects the extent to which the countryfollows thesestandardsprovidedfrom EstandardsFORUM database.


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