Corporate Cash Holdings and Firm Performance in India: An Empirical Investigation of the Effects of Audit Quality and Firm Growth

Abstract

This paper examines the effects of audit quality and firm growth on the relationship between corporate cash holdings and firm performance by using a sample of about 2500 unique non-financial Indian firms from 2000 to 2017, consisting of 51,388 firm-year observations. The results obtained by controlling for potential endogeneity using the dynamic panel generalised method of moment (GMM) approach show that cash holdings have an inverse U-shaped (concave) relationship with firm performance, which is stronger for firms with higher audit quality than firms with lower audit quality. Our findings also show that firm growth affects the cash holdings and firm performance relationship and the moderating effect of audit quality. Our study highlights the need for corporate managers to consider firm performance, audit quality and firm growth levels in policy decisions on cash holdings.