Comparing the Cash Holdings Speed of Adjustment During Economic Prosperities and Recessions

Abstract

The desire of firms to maintain the optimal level of cash arises from the fact that keeping less and more than the optimal amount of cash can decrease the firm value. This causes firms to constantly try to adjust the cash holdings ratio. The speed of adjustment depends on various factors at the firm, industry and macroeconomic level. The purpose of this study is to investigate the effect of economic prosperities and recessions on cash holdings speed of adjustment. For this purpose, 2893 observations in the period of 2003-2020 in the form of unbalanced panel data have been used. The ordinary least squares (OLS) estimator is used to estimate static models and the system generalized method of moments estimator (GMM) is used to estimate dynamic models. The research results confirm the existence of an optimal (target) cash holdings level in Iranian firms. In addition, the results show that compared to the recessions, during the prosperities, firms adjust their real cash holdings ratio more quickly to the target ratio. These results are consistent with the concepts in trade-off theory.

Keywords

• cash holdings speed of adjustment
• target ratio
• economic prosperities and recessions
• trade-off theory