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1 Introduction
Efficient management of working capital is essential for most firms. The management of working capital, in the context of this study, refers to the management of current assets and of current liabilities. Working capital components include receivables, inventory, payables, and using cash efficiently for day-to-day operations. The optimization of working capital balances helps minimize working capital requirements, which in turn, increase firms' free cash flow ([9] Ganesan, 2007). Inefficient working capital management policy, induced by poor corporate governance, has a negative impact on shareholders' wealth. Effective corporate governance serves as a check on the management of the firm's resources.
Although accounts receivable, inventory, and accounts payable are important parts of working capital management, cash is one of the most vulnerable to wanton behavior by management ([14] Isshaq et al. , 2009). Cash holding are funds readily available for investment in physical assets and for distribution to investors. In the spirit Keynesian postulations of the demand for money, firms hold cash for precautionary, speculative, and transactional motives. Transaction motive refers to cash which is held for everyday transactions to pay for goods or services. Precautionary motive refers to cash held for safety reasons to protect the firm from for unforeseen fluctuations. The speculation motive reflects firms' desire to hold cash balance in order to take advantages of any bargain purchases that may arise ([2] Besley and Brigham, 2005; [11] Gill and Shah, 2012, p. 70). [16] Kim et al. (2011) describe that both precautionary and transaction motives play important roles in explaining the determinants of cash holdings.
Excessive cash in corporate accounts is not necessarily in favor of the firm. Unnecessary cash may be built up because of poor corporate governance. Tradeoff theory, pecking order theory, and free cash flow theory usually explain the pattern of cash holdings. Firms, according to tradeoff theory, set their optimal level of cash holdings by weighting the marginal costs and marginal benefits of holding cash ([1] Afza and Adnan, 2007). The benefits of cash holding are:
- reduction in the likelihood of financial distress;
- allowing the pursuance of investment policy when financial constraints are met; and
- minimization of the costs of raising external funds or liquidating existing assets ([8] Ferreira and Vilela, 2004).
The main...