Cash holdings: Do they boost or hurt firms’ performance? Evidence from listed non-financial firms in Saudi Arabia

Abstract

Purpose: The purpose of this paper is to study the relationship between corporate cash holdings and financial performance, both linearly and non-linearly, for listed non-financial firms in Saudi Arabia. Design/methodology/approach: The data include all listed firms in Saudi Arabia’s primary stock market, excluding banks and insurance companies, over 2005–2016. The source for all data is the Osiris database. In evaluating the association between cash holdings and financial performance, static (i.e. pooled ordinary least squares) and dynamic (i.e. system generalized method of moments) specifications were implemented. Further, to confirm the non-linear linkage between cash reserves and financial performance, a U test was used. Findings: The findings show that cash holdings play a significant role in firms’ performance; specifically, this relationship is non-linear, exhibiting an inverse U shape, driven by levels of cash reserves. This non-linear relationship verifies the tenets of the trade-off theory of optimum cash level based on the benefits and costs of holding cash. Research limitations/implications: It is recommended that future studies investigate corporate liquidity and performance among Shariah-compliant firms and their conventional counterparts. Practical implications: The findings of this study provide useful insights for managers and policymakers on efficient levels of corporate liquidity management. Social implications: This paper provides further insights for investors on the role of corporate cash holding levels in firm performance. Originality/value: To the best of the author’s knowledge, this paper is among the first to explore a non-linear relationship between cash holdings and firms’ performance using accounting measures.