Cash holding levels and performance of JSE-listed firms

Abstract

The purpose of this research is to carry out an empirical study into the determinants of cash and the relationship between the levels of cash holdings and performance by South African listed non-financial firms. Plots were used to identify trends of cash holding at both a market and an industry level. The study used Generalised Method of Moments “GMM” to examine the relationships, and the analysis was also carried out controlling for factors such as primary listing in SA vs non SA, firms listed on the JSE main board vs AltX, pre- vs post-2008 credit crisis, firm size quartile and industry. The study found a significant negative relationship between cash and asset tangibility ratios, capital expenditure, and firm size irrespective of the control variable under study, whilst leverage ratio remains an insignificant determinant of cash holdings by firms throughout. The significance of the cashflow volatility is the strongest amongst large firms and amongst firms in the Consumer Services industry. The study also found a significant positive relationship between performance and cash for both the operating and market performance measures under the baseline data, which is contrary to the agency theory that excess cash erodes value. However, the results changed when constraining the analysis to cash-rich firms, where an insignificant positive relationship was found between cash and operating performance, but a significant positive relationship between cash and market performance. These conflicting results show that in the presence of good form of corporate governance, excess cash holding may not necessarily erode shareholder value.