The impact of cash holding on stock returns in small and medium enterprises on the Egyptian Nile Stock Exchange

Abstract

This paper explores the impact of cash holdings on stock returns in small and medium enterprises. The sample includes 24 SMEs listed on the Egyptian Nile Exchange, excluding service firms, with a total of 96 observations from 2016 to 2019. Data was collected from financial statements and reports obtained through an information dissemination company in Egypt. This study uses a panel data analysis with comparing all results via ordinary least squares and the generalized method of moments. The findings show a statistically significant negative effect of cash holding on stock returns in small and medium enterprises on the Egyptian Nile Exchange. Further, the evidence shows that firms with higher levels of cash holding have higher investment alternatives and then lower stock returns. This result supports the agency theory that an increase in cash holding leads to managers exploiting cash resources to achieve personal benefits, thus increasing agency costs, lowering investment efficiency, and therefore lowering stock returns. The results support the trade-off between risk and return by using cash holding to finance operational activities and investing in higher investment alternatives and then lower stock returns.

Keywords

• agency theory
• cash holding
• GMM
• investment efficiency
• OLS
• stock returns