Abstract
Literature indicates that motives and capital structure theories have been developed to explain and substantiate why firms will hold cash. However, none of these theories seem to take into consideration what are deemed to be reasons for perpetual cash holdings increases. Therefore, it seems that even the transfer of value to shareholders via dividends or share buybacks does not have significant decreasing effects on the cash balances of these firms. Consequently, it needs to be understood what is important to a firm in terms of financial flexibility. Therefore, financial flexibility is an important determinant of a firm’s capital structure, in order to take advantage of unplanned opportunities and respond in a timely manner to unexpected events, and to increase the value of the firm. Cash management models are used to manage cash holdings levels in order to ensure that cash is optimally used for operational needs, to service debt and for investment opportunities. However, cash is not being used optimally to promote efficient cash management, due to the abnormal (excess) cash holdings levels recorded on a global scale as well as in South Africa. Past research explains the determinants for holding cash mainly of Non-Financial firms. Therefore, this study will investigate cash holdings trends and determinants for the Financial’ and Non-Financial firms in South Africa. In addition, trends and determinants of cash holdings will also be investigated on a disaggregated sectoral level. This study employs trend and panel data analysis and uses financial, market, and economic data for the period 2005 to 2019. The abnormal (excess) cash holdings 3 levels identified with the trend analysis informed the panel regression analysis to investigate the determinants of cash holdings. The internal (financial and market data) and external (economic data) determinants of cash holdings were found to be the same on an aggregated and disaggregated level. The findings are in line with past research and indicate that cash holdings levels changed in order to meet daily operational needs of firms, meet debt obligations, dividend pay-outs, for investment, and research & development opportunities. This indicates that cash holdings are due to Transaction, Precautionary, and Speculative reasons as postulated by Keynes (1936), which corroborate the Trade-Off and Pecking Order Theories. Furthermore, comparing coefficient sizes of financial and non-financial sectors with abnormal (excess) cash holdings exhibit higher coefficient sizes as opposed to sectors without. As a result, the higher coefficient size shows that the internal and external determinants of cash holdings have a greater effect on the cash holdings levels of these sectors. A prevalent finding is the significant relationships between external determinants and cash holdings for both aggregated and disaggregated level views. Therefore, due to poor economic conditions, firms in these sectors will apply the Precautionary motive of Keynes (1936) in order to meet their daily needs and as a result hold onto cash. The contributions of this study are firstly, the introduction and the use of the accounting cash ratio to show the presence of abnormal (excess) cash holdings and secondly, the inclusion of both Non-Financial and Financial firms with and without abnormal (excess) cash holdings to identify determinants of cash holdings. The implications of the findings of this study are that each sector operates differently and that each firm within each sector has differing cash management policies and procedures. Therefore, looking at 4 cash holdings behaviour on an aggregated level and assuming that all sectors and firms within the collective operate the same, is a flawed assumption as shown by this study. As a result, this study recommends that the regulations governing these sectors should be documented and reviewed regularly and published with a view to gaining a better understanding of operational fundamentals of these sectors. To promote good corporate governance, South African firms must begin to record their cash holdings trends by using the accounting cash ratio introduced by this study, and also to use this mechanism to set optimal levels of cash holdings. Hereby, the cash management process can be managed efficiently, and cash can be employed optimally, to achieve a good balance between liquidity and performance of the firm, which leads to firm value appreciation and better financial performance. This will ensure that there is transparency and accountability in terms of the cash holdings levels and the cash holdings decisions made by shareholders, boards of directors and at managerial firm level. Keywords: accounting cash ratio, cash holdings, internal and external determinants, corporate governance, panel regression analysis.
D.Phil. (Accounting)