Optimal Cash Holding and Firms Profitability: A Case of Pakistan

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