DETERMINANTS OF CASH HOLDINGS

The Determinants of Cash Holdings Before, During and After the Global Financial Crisis

By

ABSTRACT

The research is aimed at evaluating the determinants of cash holdings before and after the financial crisis. The global credit crunch created a significant impact on the corporations operating in the international financial market. Companies that have greater growth opportunities are likely to have higher cash levels than mature businesses. Thus, this indicates that a negative relationship exists between growth companies and firms' characteristics that include size, level of liquid assets and short-term debt. On the contrary mature companies are likely to have a positive relation with these organizational factors. Furthermore, corporations that have greater access to the capital markets for instance large firms and companies with high credit ratings are likely to have lower ratios of cash to non-cash assets. However, as a result of global financial crisis there has been an increase in the amount of cash holdings. After the financial crisis firms are required to have 10% cash holdings, which indicate an 87% increase in abnormal cash holdings from before the crisis. Therefore, the study is aimed at exploring the relationship between financial crisis and firms' cash holdings in South Africa. The researcher will conduct secondary research using company's financial performance to assess the changes in cash ratio that occurred after the financial crisis.

ABSTRACTI

II

CHAPTER 1: INTRODUCTION1

1.1 Background1

1.2 Research Question2

1.3 Research Aims3

1.4 Research Objectives3

1.5 Problem Statement4

1.6 Significance of the Study5

1.7 Hypothesis6

CHAPTER 2: LITERATURE REVIEW7

2.1 Cash Holdings Theories7

2.1.1 The Trade-Off Theory8

2.1.2 The Pecking Order Theory8

2.1.3 The Agency Theory8

2.2 Motives for Cash Holdings8

2.2.1 The Transaction Motive9

2.2.2 The Precautionary Motive9

2.2.3 The Tax Motive10

2.3 Impact of Financial Crisis on Cash Holdings10

2.4 Access to External Capital13

2.5 Characteristics of Firms and Cash Holdings14

2.6 Determinants of Cash Holdings16

2.7 Benefits and Costs Associated with Cash Holdings16

CHAPTER 3: RESEARCH METHODOLOGY17

3.1 Secondary Research17

3.2 Qualitative V/s Quantitative Data18

3.3 Research Ethics19

3.4 Research Limitations19

3.5 Research Validity and Reliability20

CHAPTER 4: DATA ANALYSIS22

REFERENCES23

CHAPTER 1: INTRODUCTION

The global financial crisis created a significant impact on the performance of firms. The credit crunch of 2007-2008 resulted in decreasing the sales and profitability of various organizations. As a result of this financial crisis there was an increase demand for liquid assets by firms. Most of the non-financial firms found it difficult to gather funds from external sources for financing their operations due to tight financial market during the credit crunch period. Hence, this resulted in encouraging corporations to increase their cash holdings and avoid relying on external capital for instance bank loans, bond offerings and equity offerings in response to the crisis.

1.1 Background

As a developing country South Africa was also affected by the financial crisis and experienced a rapid decline in its economic growth. Therefore, the government of South Africa set out the Framework for South Africa's response to the international economic crisis. This framework included certain principles for the companies that have been affected by the crisis to enable to overcome the negative impact of the crisis (Jacobs, ...