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Cash holding and performance analysis of mutual funds: a case of an emerging financial market

Faisal Khan (Quaid-e-Azam College of Commerce, University of Peshawar, Peshawar, Pakistan)
Syed Hamid Ali Shah (Quaid-e-Azam College of Commerce, University of Peshawar, Peshawar, Pakistan)
Romana Bangash (Institute of Management Sciences, Peshawar, Pakistan)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 27 December 2021

Issue publication date: 21 November 2023

499

Abstract

Purpose

This study is about the determinants of cash holding and impact of cash holding on mutual funds’ performance. In addition, the study analyzes the impact of performance-related determinants of cash holding on funds' performance.

Design/methodology/approach

Panel data of ten years of 190 open-end mutual funds are analyzed through fixed effect regression technique. The risk-adjusted funds' performance of cash based portfolios is computed through capital asset pricing model (CAPM) (1964), Fama and French (1993) and Carhart (1997) models.

Findings

The results indicate that small size funds, high charging front-end load funds, high turnover ratio funds, high 12-month fund returns run up, high dividend paying funds and high redemption level funds hold more cash for precautionary purpose to avoid costs of cash short-falls. Further, monthly average raw returns and risk-adjusted performance of funds with the lowest raw and residual cash holding are found higher than the funds with the highest cash holding. An increase in cash is found to dilute performance.

Originality/value

This is a pioneer study in a corporate environment with shallow capital market, reliance of businesses on bank credit, firms exposed to agency issues, wealth expropriations and existence of business groups with political linkages but with opportunities of investments due to expected favorable geo-socio-political situation. The study generates outcomes relevant for other similar economies.

Keywords

Acknowledgements

The authors thank Professor Dr. Dimitrios Gounopoulos (Accounting and Finance School of Management, University of Bath), Dr. Naimat Ullah (University of Peshawar) and Associate Professor Dr. Maran Marimuthu (Management and Humanities Department, Universiti Teknologi PETRONAS) for their valuable comments.

Citation

Khan, F., Shah, S.H.A. and Bangash, R. (2023), "Cash holding and performance analysis of mutual funds: a case of an emerging financial market", International Journal of Emerging Markets, Vol. 18 No. 10, pp. 4088-4107. https://doi.org/10.1108/IJOEM-09-2020-1124

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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