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The Effect of Cash Holdings on Financial Performance: Evidence from Middle Eastern and North African Countries

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  • Ilker Yilmaz

    (Department of Accounting, Dhofar University, Salalah 211, Oman)

  • Ahmed Samour

    (Department of Accounting, Dhofar University, Salalah 211, Oman)

Abstract

This work aimed to examine the effect of corporate cash holdings on financial performance. The data covered 536 non-financial firms for the 2006–2020 period from 11 MENA region countries. This study used fixed- and random-effects testing models. To the best of the authors’ knowledge, this is the first study that aimed to study the effect of corporate cash holdings on financial performance in MENA countries in two aspects: linear and non-linear relationships. By using the return on assets, return on equity, earnings before interest, and the tax margin as the indicators of financial performance, we developed two groups of models investigating the linear and non-linear relationships between cash holdings and profitability measures. The models included several control variables, namely leverage, firm size, sales growth rate, tangibility, dividend pay-out ratio, and gross domestic product (GDP) growth rate. The results of this study revealed that both the linear and non-linear models produced significant results for the return on assets and the return on equity, but for the earnings before interest and tax margins, the linear model was insignificant. The non-linear models indicated an optimal level of cash holdings. In this context, the policymakers must actively evaluate these policies, such as working capital management and its effect on financial performance. In addition, the policymakers must consider macroeconomic conditions when designing corporate cash-holding policies.

Suggested Citation

  • Ilker Yilmaz & Ahmed Samour, 2024. "The Effect of Cash Holdings on Financial Performance: Evidence from Middle Eastern and North African Countries," JRFM, MDPI, vol. 17(2), pages 1-12, January.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:2:p:53-:d:1329832
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    References listed on IDEAS

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    1. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    2. Ivalina Kalcheva & Karl V. Lins, 2007. "International Evidence on Cash Holdings and Expected Managerial Agency Problems," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1087-1112.
    3. Dittmar, Amy & Mahrt-Smith, Jan, 2007. "Corporate governance and the value of cash holdings," Journal of Financial Economics, Elsevier, vol. 83(3), pages 599-634, March.
    4. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
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    Cited by:

    1. Tahir Akhtar, 2025. "Cash holdings in MENA region: evidence from trade-off model, pecking order theory, and agency theory," Future Business Journal, Springer, vol. 11(1), pages 1-18, December.

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