COVID-19, Cash Holdings and Speed of its Adjustment

Document Type : Research Paper

Authors

1 Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamadan, Iran

2 Department of Accounting, Takestan Branch, Islamic Azad University, Takestan, Iran

3 Department of Accounting, Faculty of Social Sciences, Razi University, Kermanshah, Iran

Abstract

Objective: Because cash surpluses and deficits decrease the firm's value, managers try to keep the optimal amounts of cash. In other words, firms try to move their actual cash ratio towards the optimal ratio. Various factors affect the level of cash holdings and its adjustment speed. This research studies the effect of the COVID-19 pandemic, which has strengthened the precautionary motivation to keep cash.

Method: This research used the observations of 159 firms from 2008 to 2022 and applied the generalized least squares regression (GLS) and the system generalized method of moments (system-GMM) by controlling the industry and year effects.

Findings: The results show that compared to the previous years, during the period of the COVID-19 pandemic, the firms’ cash holdings ratio has doubled and the speed of its adjustment has also increased by nearly 40%. The results of robustness tests that are consistent with the research’s main findings are consistent with the concepts proposed in the pecking order and the trade-off theories.

Innovation: This research expands the existing literature on the effect of COVID-19 on the precautionary motives of cash holding and by emphasizing the role of the COVID-19 pandemic in intensifying the financial pressures on firms, it indicates the increase in cash holdings speed of adjustment as a way to avoid the financial consequences of this pandemic.

Keywords

Main Subjects

Journal of Asset Management and Financing

Articles in Press, Accepted Manuscript
Available Online from 05 August 2024

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