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The Firm’s Business Strategy, Cash Holdings and its Speed of Adjustment

Document Type : Research Paper

Authors

1 Assistant Professor of Accounting, Bu-Ali Sina University, Hamadan, Iran

2 Assistant Professor of Accounting, Payame Noor University, Tehran, Iran

3 Ph.D. Student in Accounting, Bu-Ali Sina University, Hamadan, Iran

Abstract

The existence of firms' excess cash causes resources to stagnate and, cash deficit causes loss of investment opportunities. Therefore, firms generally try to maintain an optimal level of cash holdings. In addition, firms attempt to quickly correct any deviations from the optimal level of cash holdings. The level of cash holdings and the speed of correcting the gap between the actual and the optimal level of cash holdings depend on several factors. The purpose of this study is to investigate the effect of the firm's business strategies (defenders and prospectors) on the level of cash holding and its speed of adjustment. In this regard, the data of 120 firms listed on the Tehran Stock Exchange (TSE) during 2013-2020 (960 firm-years) have been used. The static models are estimated using ordinary least squares (OLS) estimator and, the system generalized method of moments estimator (GMM) is used to estimate dynamic models. The results show that the prospectors have a smaller cash holdings ratio than defenders, and also, the prospectors have lower cash holdings speed of adjustment than defenders. The results of supplementary tests that confirm the research's main findings are consistent with the predictions made in trade-off theory.

Keywords

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References
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Empirical Studies in Financial Accounting
Volume 19, Issue 73
April 2022
Pages 57-84
Files
History
  • Receive Date: 29 October 2021
  • Revise Date: 10 April 2022
  • Accept Date: 26 April 2022
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