Corporate cash holdings, working capital, and profitability: Evidence from Saudi Arabia

This article examines the influence of networking capital, leverage, and profitability on a firm’s cash holdings. A firm’s level of cash reserves is a trade-off between financing, investment, and market climate. To achieve this trade-off, firms maintain cash reserves as a preservative motive. A firm with optimized working capital will have low working capital requirements, which will result in an increase in the firm’s cash reserves. In this context, the present study acquires data from 51 firms in the manufacturing sector registered on the TASI (Tadawul All Share Index) from 2014 to 2022. The study considers cash as a regressand, net working capital, profitability, and leverage as predictor variables, and firm size as a control variable. The study observed that the manufacturing firms in Saudi Arabia invest excess cash in profitable projects. The study wrapped up the results by using pooled regression and panel regression with fixed and random effects. Panel regression results report a negative and significant influence of net working capital on firms’ cash reserves with a coefficient of –0.09. Leverage positively influences the firms’ cash reserves with a coefficient of 0.05 and is significant, and profitability is positive and significant with a coefficient of 0.04. Further, firm size is positive and significant with a coefficient of 0.004. AcknowledgmentThe author acknowledges that the current project under research project number PSAU/2023/01/27013 was funded by Prince Sattam Bin Abdulaziz University.