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Does economic risk affect corporate cash holdings?

Author

Listed:
  • Ahmed Imran Hunjra
  • Tahar Tayachi
  • Rashid Mehmood
  • Anwaar Hussain

Abstract

Purpose - Economic risk plays a vital role in firm's cash holdings. We aim to determine the impact of economic risk on the firm's cash holdings. Design/methodology/approach - The data is collected from the DataStream from 2002 to 2018, which covers 552 listed firms in the manufacturing sector of Pakistan, Sri Lanka, India and Bangladesh. We apply a two-step dynamic panel estimation to analyze the results. Findings - We use the variance of inflation and variance of interest rate as proxies of economic risk. Our results show that variance of inflation has a significant and negative effect while the variance of interest rate has a significant and positive effect on firms' cash holdings in selected countries. Furthermore, we find economic risk negatively affects the firm's cash holdings in the country-wise analysis. Firms should maintain a reasonable amount of cash reserves to handle uncertain situations. Originality/value - This study may provide insights to financial decision-makers of a firm for better cash management according the economic conditions of the country.

Suggested Citation

  • Ahmed Imran Hunjra & Tahar Tayachi & Rashid Mehmood & Anwaar Hussain, 2021. "Does economic risk affect corporate cash holdings?," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 38(3), pages 471-484, March.
    • Handle: RePEc:eme:jeaspp:jeas-05-2020-0069
    DOI: 10.1108/JEAS-05-2020-0069
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