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Cash holdings and firm performance: empirical analysis from Shariah-compliant and conventional corporations

Faisal Alnori (Finance Department, King Abdulaziz University, Jeddah, Saudi Arabia)
Abdullah Bugshan (Department of Business Administration, Jubail Industrial College, Jubail Industrial City, Saudi Arabia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 19 October 2022

Issue publication date: 14 April 2023

427

Abstract

Purpose

This paper aims to provide a comprehensive investigation into the different roles of cash holding decisions on Shariah-compliant and non-Shariah-compliant firms’ performance. Therefore, the objective of this study is to analyze the significant relationship of liquidity on Shariah- and non-Shariah-compliant corporations.

Design/methodology/approach

This study sample includes non-financial firms listed in six Gulf Cooperation Council (GCC) markets between 2005 and 2019. The study uses panel fixed effects and the dynamic generalized method of moments (system-GMM) models to test the relationship between cash holding and firm performance. The firms’ performance is measured using four widely used proxies representing book and market measures of performance including return on assets, return on equity, earnings before interest and tax to total assets and Tobin’s Q.

Findings

The results explore that the nature of the relationship between cash holdings and performance varies across Shariah-compliant and non-Shariah-compliant firms. Specifically, cash holdings are positively and significantly related to Shariah-compliant firms’ performance. However, cash reserves are not significantly related to conventional firms’ performance. These findings indicate that Shariah-compliant firms rely more on their cash holdings to avoid costly and less available external financing, meet everyday business needs and invest in profitable projects. In contrast, the value for cash holding is less important for non-Shariah-compliant firms, as their external financing options are less restricted compared to Shariah-compliant firms.

Research limitations/implications

This study is not free from limitations. More specifically, the sample of this study comprises of firms listed in GCC countries, which share common features. It would be interesting for future research to examine the linkage between cash holdings and Shariah-compliant and conventional firms’ performance by applying a larger sample, such as firms located in countries of the Organization of Islamic Cooperation.

Practical implications

The findings of this paper provide useful insights for managers and investors on the important role of cash management for Shariah-compliant firms. Policymakers and bankers need to develop Shariah-based financial products to ease Islamic financing sources. Moreover, the findings of this paper call for more research on the importance of liquidity management for Shariah-compliant firms.

Originality/value

This study extends the Islamic finance literature by exploring the key role of cash holdings to Shariah-compliant firms. To the best of the authors’ knowledge, this study is the first study to investigate cash holdings and performance between Shariah-compliant and non-Shariah-compliant firms.

Keywords

Acknowledgements

The authors would like to thank and acknowledge the valuable feedback and support received from the Central Bank of Saudi Arabia under the Islamic Finance Research Support Initiative.

Citation

Alnori, F. and Bugshan, A. (2023), "Cash holdings and firm performance: empirical analysis from Shariah-compliant and conventional corporations", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 16 No. 3, pp. 498-515. https://doi.org/10.1108/IMEFM-01-2022-0005

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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