Factors influencing liquidity position of Indian manufacturing companies

Amit Tripathy · Shigufta Hena Uzma

12 citations0/0 files storedJournal of Accounting in Emerging Economies

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Purpose The purpose of this paper is to investigate the increasing demand for corporate liquidity and examines the various factors influencing the cash position of firms in India. The financial policy to hold cash gained impetus after the financial crisis when the companies faced a severe cash crunch. However, the firms operating in emerging nations have an imperfect market mechanism with stringent regulatory norms. Thus, this paper attempts to examine the determinants of corporate cash holdings in an emerging country like India. Design/methodology/approach The paper focuses on the impact of various factors (leverage, firm size, profitability, growth along with other variables), on the cash structure of all the manufacturing companies listed on the Bombay stock exchange. The study employs panel data methodologies over a sample of 323 firms over a period of eight years from 2010 to 2017. Findings Significant estimators affecting cash holdings of a firm are the size of a firm, debt levels, tangibility, sales growth and research and development expense. Overall, the study finds evidence on the existence of Pecking Order theory in explaining the determinants of cash holdings in the Indian market. Research limitations/implications The study attempts to explore the critical determinants of cash in the Indian context which can be useful for managers and academicians to understand how the key theories of cash holdings operate in an emerging economy like India. Originality/value India is an emerging economy and has recently gained global attention and has become a hotspot for foreign investments. Thus, this paper explores pieces of evidence on the critical factors affecting cash holdings in India. The study would provide an understanding of the existing cash policy in the Indian context and attempts to find the changes in the financing structure adopted by the manufacturing industry in the given period.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1988Financing Constraints and Corporate Investment 1999The determinants and implications of corporate cash holdings 2004The Cash Flow Sensitivity of Cash 1984The Capital Structure Puzzle 1992Liquidation Values and Debt Capacity: A Market Equilibrium Approach 2009Why Do U.S. Firms Hold So Much More Cash than They Used To?

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