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This study examines the determinants of corporate cash holdings and their implications for non-financial firms by pursuing three main objectives. The first objective examines firm-specific factors that determine the optimal level of corporate cash holdings. Empirical results are consistent with some of the theories such as information asymmetry theory, financial distress hypothesis and the transaction costs hypothesis that suggests that the higher fixed processing fee for obtaining external financing discourages smaller firms to go for external financing and hence prompting them to hold more liquid assets. Nevertheless, these results support the argument of Opler et al. (1995) that larger firms have more capacity to accumulate cash since they are presumably more profitable. The results also suggest that Pakistani companies are sensitive to the volatility of cash flow and that firm’s cash holdings are highly influenced by a precautionary need. Empirical evidence also lends credence to the argument that credit market frictions are responsible for high correlation between cash holdings and cash flow of the firm. Results also indicate that there are no differences in the patterns of cash holdings between the group-affiliated and the non-group businesses. Second objective of the study examines the effect of corporate governance on cash holdings. Results are line with the finance literature which suggests a role for effective corporate governance in disciplining managers and weak governance may lead to a tendency of the managers to hold excess cash holdings. Empirical results are also in line with the interest alignment hypothesis. Finally, third objective of our study examine cash holding behavior under macroeconomic uncertainty. Empirical results provide support to the hypothesis that uncertainty in macro-economic variables leads firms to similar cash holding behavior since uncertainty in the macroeconomic environment can affect the manager’s ability to predict their future cash flows.
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