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Determinants of cash holding of Nepalese commercial banks / Usmita Dahal
Title : Determinants of cash holding of Nepalese commercial banks Material Type: printed text Authors: Usmita Dahal, Author Publication Date: 2019 Pagination: 140p. Size: GRP/Thesis Accompanying material: 14/B Languages : English Abstract: Cash is the most liquid assets and is the measure of a corporation’s ability to pay its bills on time. Cash holding is important because it provides corporations with liquidity. To grow sales and profits, a corporation needs to build up cash reserves by ensuring that the timing of cash movements (Gill and Shah, 2012). Thus, cash is the essential ingredient that enables a business to survive and prosper. According to Cossin and Hricko (2004), cash holdings help the corporation for optimal timing of an investment and avoid the underpricing issue. However, holding excessive cash does not necessarily make good business sense. Therefore, financial managers need to understand the determinants of cash holdings in a corporation.
Adetifa (2005) defined cash holding into two categories. One is opportunity cost of interest inevitable and other is purchasing power cost of firm. According to Gill and Shah (2012), a cash holding is defined as cash in hand or readily available for investment in physical assets and to distribute to investors. The effective profit forgone on holding large cash balance is an opportunity cost to the firm. Cash holding, economic factors, and economic value added are so important to all banks and financial firms in making decisions. In some cases, banks do not hold cash because they have specific or particular investments in mind than to finance with the cash. Banks hold huge cash amounts and use the cash during economic and financial crises to buy assets from distressed and large strong firms at bargain prices. It is good to know that the advantage of holding cash becomes a bit smaller in developed markets but certainly it will still exist (Al-Nimri and Samerrai, 2015).
The various motives for cash holding will have different implications for the value of the cash holdings. Cash held due to precautionary motives will affect firm value in different way than cash held as a result of controlling managers. Pinkowitz and Willaimson (2001) analyzed the value of corporate cash holdings. The study found that the value of cash is higher when a firms investment prospects and operating cash flows are more volatile. This indicates that cash held as a result of the precautionary motive will positively impact cash value. The same study showed that with poor investment opportunities and low volatility of investment plans and cash flows, cash will be valued at a discount.
The basic purpose of hoarding cash includes a reduction in the chances of financial shocks, minimizing transaction costs, circumventing external sources of financing and allowing the investment projects to perform efficiently in the presence of financial constraints (John, 1993 and Denis and Sibilkov, 2010). Holding cash in a firms reserves acts as a buffer against future financial shocks and firms tend to accumulate cash to hope with the financial crisis likely to occur in coming years. Holding cash also minimizes transaction cost of liquidating assets or costs associated with raising external finance (Mulligan, 1997). Cash holdings are found to be decreasing with the firms size and debt ratio and increasing with its profitability, growth prospects, and dividend payout ratio (Cressy, 1996). The US firms with higher cash levels showed more growth opportunities, more volatility in their cash flows and less profitability in their productive assets (Kim et al., 1998). Gill and Shah (2012) examined the determinants of corporate cash holdings in Canada. The study found that leverage has positive and significant impact on cash holdings. Additionally, the result also showed that market-to-book ratio, cash flow, net working capital, firm size, board size, and the CEO (chief executive officer) duality significantly affect the corporate cash holdings in Canada.
The study based on the secondary data which are gathered for 20 commercial banks in Nepal for the period of 6 years from 2012/13 to 2017/18. The data for independent variables like leverage, firm size, market to book value, liquid assets, cash flow and dividend payout data are taken from the respective websites and annual reports of the selected commercial banks. The descriptive and causal comparative method are used to analyze the data.
The descriptive analysis shows that the average cash ratio is 5.873 percent. Similarly, the average net cash ratio ranges is 6.424 percent. The average leverage ratio of selected banks during the study period is 88.788 percent. Likewise, the average firm size is rupees 67.692 billion. However, the average market to book value is 4.067 times. The average ratio of liquid assets is 14.447 percent. The average cash flow is 2.144 percent. Similarly, average ratio of dividend payout is 0.816 for selected banks during the study period 2011/12 to 2017/18.
The study also concludes that there is a negative relationship between cash holdings and leverage. Similarly, the study result revealed that firm size is negatively related to cash holdings. However, the study also shows that market to book value ratio is also positive and significantly related to the cash holdings. Likewise, the study also shows that liquid assets have positive and significant relationship with cash holdings. The study also shows that cash flow has also positive relationship with cash holdings. Also, the study shows that dividend payout has positive relationship with cash holdings.
The study reveals that leverage and firm size have negative impact on cash holdings. The study also shows that market to book value ratio, liquid assets, cash flow and dividend payout have positive impact on cash holdings for Nepalese commercials banks. Similarly, the study concludes that market to book value ratio and liquid assets have significant impact on the cash holdings in the context of Nepalese commercial banks. The study also concludes that the most influencing factors that explain the changes in cash holdings of Nepalese commercial banks is liquid assets followed by market to book value ratio.
Determinants of cash holding of Nepalese commercial banks [printed text] / Usmita Dahal, Author . - 2019 . - 140p. ; GRP/Thesis + 14/B.
Languages : English
Abstract: Cash is the most liquid assets and is the measure of a corporation’s ability to pay its bills on time. Cash holding is important because it provides corporations with liquidity. To grow sales and profits, a corporation needs to build up cash reserves by ensuring that the timing of cash movements (Gill and Shah, 2012). Thus, cash is the essential ingredient that enables a business to survive and prosper. According to Cossin and Hricko (2004), cash holdings help the corporation for optimal timing of an investment and avoid the underpricing issue. However, holding excessive cash does not necessarily make good business sense. Therefore, financial managers need to understand the determinants of cash holdings in a corporation.
Adetifa (2005) defined cash holding into two categories. One is opportunity cost of interest inevitable and other is purchasing power cost of firm. According to Gill and Shah (2012), a cash holding is defined as cash in hand or readily available for investment in physical assets and to distribute to investors. The effective profit forgone on holding large cash balance is an opportunity cost to the firm. Cash holding, economic factors, and economic value added are so important to all banks and financial firms in making decisions. In some cases, banks do not hold cash because they have specific or particular investments in mind than to finance with the cash. Banks hold huge cash amounts and use the cash during economic and financial crises to buy assets from distressed and large strong firms at bargain prices. It is good to know that the advantage of holding cash becomes a bit smaller in developed markets but certainly it will still exist (Al-Nimri and Samerrai, 2015).
The various motives for cash holding will have different implications for the value of the cash holdings. Cash held due to precautionary motives will affect firm value in different way than cash held as a result of controlling managers. Pinkowitz and Willaimson (2001) analyzed the value of corporate cash holdings. The study found that the value of cash is higher when a firms investment prospects and operating cash flows are more volatile. This indicates that cash held as a result of the precautionary motive will positively impact cash value. The same study showed that with poor investment opportunities and low volatility of investment plans and cash flows, cash will be valued at a discount.
The basic purpose of hoarding cash includes a reduction in the chances of financial shocks, minimizing transaction costs, circumventing external sources of financing and allowing the investment projects to perform efficiently in the presence of financial constraints (John, 1993 and Denis and Sibilkov, 2010). Holding cash in a firms reserves acts as a buffer against future financial shocks and firms tend to accumulate cash to hope with the financial crisis likely to occur in coming years. Holding cash also minimizes transaction cost of liquidating assets or costs associated with raising external finance (Mulligan, 1997). Cash holdings are found to be decreasing with the firms size and debt ratio and increasing with its profitability, growth prospects, and dividend payout ratio (Cressy, 1996). The US firms with higher cash levels showed more growth opportunities, more volatility in their cash flows and less profitability in their productive assets (Kim et al., 1998). Gill and Shah (2012) examined the determinants of corporate cash holdings in Canada. The study found that leverage has positive and significant impact on cash holdings. Additionally, the result also showed that market-to-book ratio, cash flow, net working capital, firm size, board size, and the CEO (chief executive officer) duality significantly affect the corporate cash holdings in Canada.
The study based on the secondary data which are gathered for 20 commercial banks in Nepal for the period of 6 years from 2012/13 to 2017/18. The data for independent variables like leverage, firm size, market to book value, liquid assets, cash flow and dividend payout data are taken from the respective websites and annual reports of the selected commercial banks. The descriptive and causal comparative method are used to analyze the data.
The descriptive analysis shows that the average cash ratio is 5.873 percent. Similarly, the average net cash ratio ranges is 6.424 percent. The average leverage ratio of selected banks during the study period is 88.788 percent. Likewise, the average firm size is rupees 67.692 billion. However, the average market to book value is 4.067 times. The average ratio of liquid assets is 14.447 percent. The average cash flow is 2.144 percent. Similarly, average ratio of dividend payout is 0.816 for selected banks during the study period 2011/12 to 2017/18.
The study also concludes that there is a negative relationship between cash holdings and leverage. Similarly, the study result revealed that firm size is negatively related to cash holdings. However, the study also shows that market to book value ratio is also positive and significantly related to the cash holdings. Likewise, the study also shows that liquid assets have positive and significant relationship with cash holdings. The study also shows that cash flow has also positive relationship with cash holdings. Also, the study shows that dividend payout has positive relationship with cash holdings.
The study reveals that leverage and firm size have negative impact on cash holdings. The study also shows that market to book value ratio, liquid assets, cash flow and dividend payout have positive impact on cash holdings for Nepalese commercials banks. Similarly, the study concludes that market to book value ratio and liquid assets have significant impact on the cash holdings in the context of Nepalese commercial banks. The study also concludes that the most influencing factors that explain the changes in cash holdings of Nepalese commercial banks is liquid assets followed by market to book value ratio.
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Barcode Call number Media type Location Section Status 642/D USM Thesis/Dissertation Uniglobe Library Philosophy & Psychology Available