The Financial Determinants of Firms’ Cash holding: Evidence from Different Economic sectors of Pakistan

Abstract

The study aims to analyze the financial determinants of firms’ cash holdings in different sectors of the economy of Pakistan such as Textile, Manufacturing, Energy, Information & Communication, Chemical, and Food. The study analyzes a sample of 305 listed companies on the Pakistan Stock Exchange (PSX) from 2017 to 2022 and provides a comparative sectoral analysis using three regression models, namely: Ordinary Least Square (OLS), Fixed Effects, and Random Effects models, based on trade-off theory and pecking order theory.

The results show sector-specific relationships: in the textile sector, cash holdings are positively related with debt ratio, liquidity, and firm size but negatively associated with return on assets and market-to-book value. In the manufacturing space, there are negative correlations between cash and liquidity as well as debt. In the information and communication sector, on the other hand, leverage, liquidity, market-to-book ratio, and firm size have a positive effect on cash holdings.

The chemical industry has positive relationships between liquidity, dividends, and cash holdings, and a negative relationship with firm size. Similarly, in the energy sector, liquidity and dividend payout have a positive effect on cash holdings. In the food sector, liquidity and market-to-book value are inversely associated with cash holdings.

The results highlight the sector-specific nature of financial determinants impacting cash management policies. Also, industries with more active business and less protection of shareholders hold on to more cash. As the economic environment changes, this indicates the need to include insights from trade-off theory and pecking order theory when formulating cash management strategies.