CORPORATE CASH HOLDINGS AND SHAREHOLDER WEALTH: EVIDENCE FROM PAKISTANI MARKET

Abstract

The purpose of this study is to understand the influence of cash holdings on shareholder wealth in Pakistan. After probing panel data ranging from 2006 to 2014, the study provides evidence that the size of the firm (RSIZE) shows noteworthy positive correlation with cash holding, whereas Leverage and Close Cash Substitute (CCS) are negatively related to cash holding. The negative correlation of leverage with cash holding provides support to the “pecking-order theory” in that companies use cash funds to pay back obligations when they turn out to be outstanding. These results also contribute some backing to the trade off theory, especially to (Keynes, 1936) “precautionary motive” where companies stockpile more cash. This study also funds that excess cash holding has a positive relation with market capitalization, which means that excess cash holdings increase shareholder wealth. These results are contrary to the earlier studies and reflect that excess cash holding has an effect on shareholder wealth in Pakistan.