Content area
Full Text
ABSTRACT: The purpose of this paper is to examine the effect of cash holdings level on firms' profitability. Three simple regression models were used to examine the relationships between cash holdings and firms' profitability using a panel data of 65 non-financial firms listed in Amman Stock Exchange (ASE) during the period from 2000 to 2011. The results showed a positive significant relationship between cash holdings and profitability. This means that a good financial performance of the firm is an outcome of vast corporate cash holdings. This positive relationship reflected the beliefs of Jordanian firms' managers that the absence of effective liquidity management will cause cash shortages and will result in difficulties in paying obligations, which negatively affected the firm's profitability. This study contributes to the practical world. It helps firms in the markets of emerging countries in general and in ASE in particular, manages their liquidity and cash. Furthermore, the study helps firms hold the percentage of cash, which lead to efficient financial performance. This study encourages the future researches to find out the suitable strategies related to cash holdings.
KEYWORDS: Cash Holdings, Profitability, Return on Assets (ROA), Return on Equity (ROE), Earnings per share (EPS), Amman Stock Exchange (ASE).
1 INTRODUCTION
The financial crisis (2007-2009) has returned the attention back to cash holdings and liquidity management, directing the efforts to the policies to improve the company's cash management. The first function of cash management is to secure the short term normal business activities, manage resources and enhance liquidity (Allman-Ward & Sagner, 2003). The essential objective of this practice is to reduce the percentage of liquid assets held by companies in order to fulfill their ongoing activities on one hand, and on the another hand, to achieve a sufficient level of cash holdings to empower the company to obtain trade discounts to achieve acceptable credit rating and to meet unexpected cash requirements (Brigham, Gapenski, & Daves, 2003).
Cash holdings have many advantages related directly to investment activities, especially in flexibility and capitalizing on opportunities. Firms with high cash holdings can take advantage of more investment opportunities without being too restricted by capital, ensure adequate capital for planned or unplanned opportunities (business expansion, market opportunities during the financial crisis, when unexpected news brings a stock...