Determinants of corporate cash Holdings: the case of Kenyan quoted companies

Relatively few empirical studies have been carried out to establish the determinants of corporate \ncash holdings. The few carried out e.g. Ozkan (2000) were carried out in the developed markets \nand their applicability in developing markets such as Kenya is not known. Therefore, the purpose \nof this study was to finding out how specific firm-characteristics affect level of cash held in firms. \nThis study empirically examines the determinants of corporate cash holding for Kenyan \ncompanies. Finance and economic literature give three motives why firms and individuals hold \ncash as; the transaction motive, the precautionary motive and the speculative motive. Weston \n(1998) \nOur sample is based on 28 firms in the three non-financial sectors of the Nairobi Stock Exchange \n(NSE). The firms in the financial sector were excluded from the sample since their cash balances \nare dictated by law, most significantly the Kenyan Banking Act. \nOn constructing industry-wide cash-holding models, we find that Growth, cashflow variability, \nprofits, size and maturity structure of long-term debt have significant influence on corporate \ncashholding. However, liquidity; leverage and cashflows have no significance in determining \ncashflows. \nWe have also developed firm-specific cash-holding models for each of the 28 firms and find that \nthe firm specific characteristics are very important in determining the best cash holding models. \nHowever, impact of these factors in different across the firms. We find that at firm level, the \ninfluence of debt maturity structure is not significant for cash-holdings decisions. This mirrors the \nfinding by Ozkan (2001) who was carrying out a study on UK firms. The insignificance of maturity \nstructure of long-term debt may be because Kenyan firms are mainly financed using internally \ngenerated funds and short term bank overdrafts. \nFurther, we did not find evidence-supporting liquidity as an important factor in determining the \nlevels of cash-holding decisions. \nOur findings also reveal that unobserved firm heterogeneity, as reflected in the firm-specific fixed \neffects, is significant in affecting cash holding decisions of firms. \n implications of our findings are that firms need to identify the characteristics that have the \ngreatest impact on their cash holding behaviour and the appropriate cash levels should thus be \ndetermined using the appropriate firm-specific model