The effect of financial performance, IOS, and firm size on cash holdings: the role of dividend policy as moderating variable

Woen Cliff Wibowo, Sugeng Wahyudi


DOI: https://doi.org/10.14710/dijb.2.2.2019.96-106

Abstract


This study aims to determine and analyze the effect of financial performance (profitability, leverage, capital expenditure, liquid asset substitute), IOS, and company size on cash holding by using dividend policy as a moderating variable. The number of samples of this study was 108 observations of non-financial companies in the LQ 45 Index for the period  of 2011-2016. The results of moderated regression analysis (MRA) shows that profitability has a positive effect on cash holding, while leverage, liquid asset substitute, IOS, and firm size have negative effect on cash holdings. The results of this study also show that dividend policy can be a moderating variable which weakens the positive effect of profitability on cash holding and strengthens the negative effect of capital expenditure, but the dividend policy is not able to moderate the influence of leverage on cash holding. As a result, the companies were able to make large dividend payouts to reduce the excessive amount of cash holding that managers often abused for their own benefits and increasingly prospering investors with a given dividend.

Keywords


cash holding; profitability; leverage; capital expenditure; liquid asset substitute; IOS; firm size; dividend policy

Full Text:

PDF

References


Al-Najjar, B. (2013). The financial determinants of corporate cash holdings: Evidence from some emerging markets. International Business Review, 22(1), 77–88. https://doi.org/10.1016/j.ibusrev.2012.02.004

Al-Najjar, B., & Clark, E. (2017). Corporate governance and cash holdings in MENA: Evidence from internal and external governance practices. Research in International Business and Finance, 39, 1–12. https://doi.org/10.1016/j.ribaf.2016.07.030

Belghitar, Y., & Khan, J. (2013). Governance mechanisms, investment opportunity set and SMEs cash holdings. Small Business Economics, 40 (1), 59–72. https://doi.org/10.1007/s11187-011-9366-z

Drobetz, W., & Grüninger, M. C. (2007). Corporate cash holdings: Evidence from Switzerland. Financial Markets and Portfolio Management, 21(3), 293–324. https://doi.org/10.1007/s11408-007-0052-8

Ferreira,M.A., & Vilela,A.S. (2003). Why Do Firms Hold So Much Cash:Evidence From EMU Countries, European Financial Management, 10, 295-319. http://dx.doi.org/10.2139/ssrn.614002

Foster, G. (1986). Financial statement analysis, New Jersey: Prentice-Hall Englewood Cliffs

Gill, A., & Shah, C. (2012). Determinants of corporate cash holdings: Evidence from Canada. International Journal of Economics and Finance, 4(1), 70-79.

Jani, E., Hoesli, M., & Bender, A. (2011). Corporate Cash Holdings and Agency Conflicts. SSRN Electronic Journal, 1–30. https://doi.org/10.2139/ssrn.563863

Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.

Jensen, M. C. (2007). Agency Costs of Free Cash Flow , Corporate Finance , and Takeovers Michael C . Jensen The American Economic Review , Vol . 76 , No . 2 , Papers and Proceedings of the Ninety-Eighth Annual Meeting of the American Economic Association . ( May , 1986 ), pp . 76(2), 323–329.

Kariuki, S. N., Namusonge, G. S., & Orwa, G. O. (2015). Determinants of corporate cash holdings: evidence from private manufacturing firms in Kenya. International Journal of Advanced Research in Management and Social Sciences, 4(6), 15-33.

Keynes, John M. (1936). The General Theory of Employment, Interest and Money (pp. 170-174) , New York: Harcout Brace Jovanovich

Kim, J., Kim, H., & Woods, D. (2011). Determinants of corporate cash-holding levels: An empirical examination of the restaurant industry. International Journal of Hospitality Management, 30(3), 568–574. https://doi.org/10.1016/j.ijhm.2010.10.004

Lian,Y., Sepheri,M., Foley,M. (2009). in T Imes of F Inancial C Risis. European Business Organization Law Review, 1(71002056), 1–8. https://doi.org/10.1093/ajae/aaq031

Lintner, J. (1962) Dividends, Earnings, Leverage, Stock Prices and the Supply of Capital to Corporations. The Review of Economics and Statistics, 44, 243-269.

http://dx.doi.org/10.2307/1927792

Mesfin, E. A. (2016). The Factors Affecting Cash Holding Decisions Of Manufacturing Share Companies In Ethiopia. International Journal of Advanced Research in Management and Social Sciences, 5(3), 48–67.

Miller, M. H., Orr, D. (1966). A Model of the Demand for Money by Firms. The Quarterly Journal of Economics. 80(3), 413-435

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0

Naoki, S. (2012). Firms’ Cash Holdings and Performance: Evidence from Japanese corporate finance.

Ogundipe, S. E., Salawu, R. O., & Ogundipe, L. O. (2012). The Determinants of Corporate Cash Holdings in Nigeria: Evidence from General Method of Moments (GMM). International Journal of Social, Behavioral, Educational, Economic, Businessand Industrial Engineering, 6(1), 152–158. Retrieved from scholar.waset.org/1999.1010/4420

Rizwan, M., Javed, T (2011). Determinants of corporate cash holdings : Evidence From Pakistani Corporate sector. Journal of Economics, Management and financial Markets 6 (1), 344-358

Yang, X., Han, L., Li, W., Yin, X., & Tian, L. (2017). Monetary policy, cash holding and corporate investment: Evidence from China. China Economic Review, 46(September), 110–122. https://doi.org/10.1016/j.chieco.2017.09.001




Copyright (c) 2019 Diponegoro International Journal of Business

License URL: http://creativecommons.org/licenses/by-sa/4.0