Do macroeconomic conditions affect corporate cash holdings and cash adjustment dynamics? Evidence from GCC countries

Abstract

Purpose

This study aims to investigate the influence of macroeconomic conditions on corporate cash holdings in terms of their influence on the level of cash and the speed of adjustment of cash to target levels in the Gulf Cooperation Council countries (GCC).

Design/methodology/approach

The study employs both static and dynamic regression analyses considering a sample of 2,878 firm-year observations drawn from stock markets in GCC countries over the 2010–2018 period.

Findings

Consistent with the precautionary motive, the results show that GCC firms tend to accumulate cash reserves in weak economic periods. Evidence also reveals that the estimated adjustment coefficients from dynamic panel models show that GCC firms adjust more slowly toward their target cash ratio in periods of unfavorable economic conditions.

Practical implications

This study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering financial constraints imposed by macroeconomic conditions. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of macroeconomic factors on firm's cash holding decision. Therefore, in an effort to increase the supply of external financing available to firms, policymakers may devise investment friendly environment by controlling macroeconomic factors.

Originality/value

This paper offers some insights on the macro determinants of cash holdings by investigating emerging economies. It explores the role of macroeconomic conditions on corporate cash holdings in terms of their influence on the costs of external funds and financial constraints.

Citation

Guizani, M. and Ajmi, A.N. (2023), "Do macroeconomic conditions affect corporate cash holdings and cash adjustment dynamics? Evidence from GCC countries", International Journal of Emerging Markets, Vol. 18 No. 9, pp. 2643-2662. https://doi.org/10.1108/IJOEM-03-2020-0291