Optimal Cash Holding and Firms Profitability: A Case of Pakistan

Authors

DOI:

https://doi.org/10.56536/ijmres.v12i4.360

Keywords:

Cash Holding Ratio, Profitability, Threshold Regression, Panel Data, Osiris Database

Abstract

The study enhances the existing literature in corporate finance by estimating the maximum threshold effect of a cash holding ratio on a company's profitability. The panel data of 201 Pakistani publicly traded businesses were taken from the Osiris database between 2009 and 2018 to implement a panel threshold regression model. The findings suggest a two-threshold relationship between the optimal cash holding ratio and corporate profitability, and cash holding rates below 4.3% can potentially increase a company's efficiency. The coefficient is positive until the cash-on-hand ratio hits 4.3%, which becomes negative. Therefore, there is a nonlinear relation between the cash holding ratio and the business's profitability. The most important aspects of the predictors were cash flow and the size of the companies. Businesses should analyze the optimal ratio of holding cash and balance the expenses of storing cash against its potential advantages. Previous studies solely concentrated on the reasons and elements of cash holding but never addressed the question of what percentage of cash a company should keep on hand to attain cash sustainability

Author Biographies

Abdul Rashid, Hailey College of Commerce, University of the Punjab, Lahore, Pakistan

 

 

Nimra Riaz, Government College University Faisalabad, Pakistan

 

 

 

Ahsan Riaz, Government College University Faisalabad, Pakistan

 

 

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Published

2022-12-23

How to Cite

Rashid, A., Riaz, N., & Riaz, A. (2022). Optimal Cash Holding and Firms Profitability: A Case of Pakistan. International Journal of Management Research and Emerging Sciences, 12(4). https://doi.org/10.56536/ijmres.v12i4.360