The efficiency of financial intermediation and SMEs' cash holdings: empirical evidence from emerging Europe

The level of cash holdings and their determinants currently represent a hot issue in financial management research. Despite the extensive research conducted on the subject, topical knowledge on cash policies in the case of SMEs is still limited. The paper aims to analyse the effect of financial intermediation efficiency on the level of cash holdings for a large sample of gazelles from Central, Eastern and South-Eastern Europe over the period 2006-2014. The empirical results suggest a negative relationship between bank lending-deposit spread and cash holdings. Equally, this study provides empirical evidence for a non-linear relationship between cash holdings and short-term debt. At the same time, large gazelles, firms with more tangible assets and firms holding liquid assets other than cash, were shown to hold less cash. The results are robust to different econometric approaches, different sub-samples and alternative variables for cash holdings.