Cash holdings in Portuguese SMEs

: exploring drivers and implications

Abstract

Optimal liquidity management is fundamental in maximizing firm’s performance and value. Hence, this study investigates the determinants of corporate cash holdings in micro, small and medium enterprises in Portugal from 2006 to 2021. The sample is structured in panel data and the methodologies applied are random-effects, yearly dummies, yearly and industry dummies, and cross-sectional. The key findings suggest a significant negative effect of dividend payments, investment opportunities, liquid asset substitutes, firm size and longer debt maturity on cash holdings decisions. Opposingly, leverage, cash flow and cash flow volatility exhibit a significant positive association with cash reserves. Therefore, the trade-off, the pecking order and the free cash flow theories, which are the three major theoretical models in explaining the impact of firm characteristics on the levels of cash, are relevant in shedding light on liquidity management decisions in Portuguese SMEs. Furthermore, micro companies display higher cash holdings ratio in comparison with small and medium firms, demonstrating a stronger impact of payout policy, investment opportunity set, liquid asset substitutes and firm size on cash decisions. Small enterprises present a more significant effect of leverage and cash flow volatility on the levels of cash reserves, whereas cash flow and longer debt maturity impact cash holding more notably in medium firms. Moreover, the financial crisis of 2008 enhanced the associations between cash holdings and firm characteristics, excluding liquid asset substitutes and debt maturity, emphasizing the central role of cash holdings during negative economic cycles.

Date of Award	24 Jun 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)