An empirical investigation into the determinants of corporate cash holdings cash holdings : the case of Kenyan quoted companies

Abstract

Relatively few empirical studies have been carried out to establish the determinants of corporate cash holdings. The few earned out e.g. Ozkan (2000) were carried out in the developed markets and their applicability in developing markets such as Kenya is not known. Therefore, the purpose of his study was to finding out how specific firm-characteristics affect level of cash held in firms. This study empirically examines the determinants of corporate cash holding for Kenyan companies. Finance and economic literature give three motives why firms and individuals hold cash as; the transaction motive, the precautionary motive and the speculative motive. Weston (1998) Our sample is based on 28 firms in the three non-financial sectors of the Nairobi Stock Exchange (NSE). The firms in the financial sector were excluded from the sample since their cash balances are dictated by law, most significantly the Kenyan Banking Act. On constructing industry-wide cash-holding models, we find that Growth, cashflow variability, profits, size and maturity structure of long-term debt have significant influence on corporate cashholding. However, liquidity; leverage and cashflows have no significance in determining cashflows. We have also developed firm-specific cash-holding models for each of the 28 firms and find that the firm specific characteristics are very important in determining the best cash holding models. However, impact of these factors in different across the firms. We find that at firm level, the influence of debt maturity structure is not significant for cash-holdings decisions. This mirrors the finding by Ozkan (2001) who was carrying out a study on UK firms. The insignificance of maturity structure of long-term debt may be because Kenyan firms are mainly financed using internally generated funds and short term bank overdrafts. Further, we did not find evidence-supporting liquidity as an important factor in determining the levels of cash-holding decisions. Our findings also reveal that unobserved firm heterogeneity, as reflected in the firm-specific fixed effects, is significant in affecting cash holding decisions of firms. The implications of our findings are that firms need to identify the characteristics hat have the greatest impact on their cash holding behaviour and the appropriate cash levels should thus be determined using the appropriate firm-specific models .