This paper aims to attempt to investigate whether firms have a target corporate cash holding (CCH) as well as determining firms speed of adjustment towards targeted corporate cash holding (SOA-CCH) and finally analysing firms performance impact on SOA-CCH.
The study is based on 2320 Indian-listed firms using data from 2000 to 2022. A panel data approach is used to examine the impact of firm performance on cash holding and the SOA. The models used are pooled OLS, fixed effect and generalised method of moments (GMM).
The results reveal that firms are only capable of reducing the discrepancy between their current and optimal liquidity levels by 48.3% within a year, which suggests that the adjustment process is imperfect. Firm performance and SOA are associated positively in India and adjustment speed is highly sensitive to firm performance. It is found that big firms have higher cash holding as compared to small firms. It is also found that SOA is highly sensitive in times of financial crisis (GFC 2008) as compared to health crisis (Covid-19).
The study offers valuable implications for diverse stakeholders. For investors, particularly those focused on dividend income, a firm’s SOA-CCH serves as a critical factor in shaping dividend policies. Regulators can view SOA-CCH as a mechanism to ensure firms meet investor expectations and fulfil debt obligations. From a managerial perspective, under the agency theory framework, higher SOA-CCH combined with strong financial performance can influence compensation and fiduciary incentives. For owners, both high and low SOA-CCH hold significance, as they inform investment and financing decisions that maintain financial stability and long-term sustainability of the firm.
This paper contributes to the body of literature by attempting to offer a thorough analysis on the nexus between the firm performance and SOA of CCH. Additionally, the uniqueness of the paper lies in its attempt to analyse the effect of firm performance on SOA-CCH during normal as well as crisis periods such as GFC 2008 and COVID 19 crisis. The results depict that firms were more robust in reaching a financial safe position during the global financial crisis than the global pandemic crisis. The paper also examined sensitivity of adjusting their SOA-CCH by big and small firms.
