Impact of financial leverage on cash holding structure: The case of non-financial listed firms in Vietnam

The aim of this paper is to assess the impact of financial leverage on cash holding structure represented by the proportion of cash equivalents in total cash and cash equivalents of non-financial companies listed in Vietnam. We selected a sample of 300 firms from the years 2015 to 2022, and analyzed the secondary data obtained from the audited financial statements of these companies. Through robust GLS estimation, the findings show that financial leverage has a nonlinear effect on the cash holding structure, characterized by an inverted U-shaped relationship. Specifically, financial leverage positively impacts the cash holding structure if they are maintained at low levels, however this relationship turns negative at higher levels of financial leverage. These findings suggest that firms should manage their operations differently based on their levels of financial leverage. Firms with low leverage are encouraged to maintain lower cash reserves and invest in marketable securities to optimize liquidity and profitability. Additionally, they could consider issuing debt to enhance investment and operational capabilities, thereby maximizing corporate value. Conversely, firms with high leverage are advised to hold more cash and demand deposits to mitigate the risks of financial distress and bankruptcy, as they are more susceptible to such outcomes. Policymakers may consider implementing measures to reduce the possibility of financial difficulties, such as reducing reliance on debt financing and promoting equity financing opportunities.