DETERMINANTS OF CORPORATE CASH HOLDINGS IN EMERGING ECONOMIES: EMPIRICAL EVIDENCE FROM NON-FINANCIAL FIRMS IN PAKISTAN

Abstract

This research examines the factors that influence corporate cash reserves especially in an emerging market context such as Pakistan by looking at the firm-level financial characteristics and country-level governance quality as factors. The study takes a balanced panel of non-financial firms listed on the Pakistan Stock Exchange during the years 2012-2023, and utilizes a dynamic System Generalized Method of Moments (System GMM) estimator to deal with the issues of cash holding behavior persistence and endogeneity. The variables asset tangibility, liquidity, and national governance quality are included as the main ones to be explained. The way country-level governance is assessed is through six dimensions of the Worldwide Governance Indicators including voice and accountability, government effectiveness, political stability and absence of violence, regulatory quality, rule of law, and control of corruption, which are then aggregated through principal component analysis. The findings show that the asset tangibility lowers significantly the cash holdings of the company, which is in line with the collateral and trade-off approach, while liquidity has a significant positive impact thus confirming the precautionary motive for cash holding. The governance impact is complex: the government's soundness and voice and accountability are correlated positively with cash holding while political stability has an inversely related situation, this shows the context-specific nature of institutional influences. In sum, the results highlight that the interaction of internal financial conditions and external institutional environments shapes corporate cash holding decisions in Pakistan. There is a dynamic framework of integrating firm-level determinants with country-level governance through this study which contributes to the corporate finance literature and offers insight for managers, investors, and policymakers in the emerging markets.