Liquidity Management in Pakistani Firms: An Empirical Analysis

Abstract

This study investigates the factors affecting corporate cash holdings among Pakistani firms, utilizing a comprehensive analysis through multiple regression models, including OLS, fixed effects, and Fama-MacBeth methodologies. The results consistently demonstrate significant relationships between cash held by companies and various factors that are specific to firms such as market-to-book ratio, firm size, leverage, cash flow from operations, net-working capital, long-term investments, and cash flow variations. Key findings indicate that companies having greater growth potential maintain higher amount of cash, supporting the trade-off theory, while larger firms hold less cash, reflecting their better access to external financing. The negative association between borrowing and cash-holdings aligns with the pecking-order theory, and the positive association between capital expenditures and cash held by companies supports the precautionary motive. This study makes the contribution to the current research on corporate finance by providing evidence on the liquidity management practices of firms in a developing economy context, offering insights that are particularly relevant for policymakers, financial managers, and investors. The robustness of the results across different models underscores the reliability of the findings, enhancing the understanding of how various factors influence corporate cash holdings.