Financial Determinants of Liquidity Positions of Listed Manufacturing Firms on the Nigerian Stock Exchange

Abstract

The study evaluated the influence of financial determinants on cash holdings of selected quoted manufacturing firms in Nigeria. Specifically, the effect of these determinants (return on assets, financial leverage, dividend payment, cash flow volatility and market to book ratios) on cash holdings was examined. Influence of other determinants used in extant literature designated control variables in this instance was also investigated. Ex-post-facto research approach via quantitative panel methodology was employed to ascertain the effect of the predictors on corporate cash holdings. Data were collated from the audited annual reports of forty-one (41) firms for the thirteen year period: 2006-2018. Diagnostic tests confirmed the consistency and suitability of the Fixed Effects (FE) panel regression models. In other words, data were analyzed by means of Prais-Winsten Regression Correlated Panels Corrected Standard Errors (PCSEs). Findings indicate the existence of a significant positive influence of cash flow volatility, net working capital, market to book ratio on corporate cash holdings, but a significant negative effect of dividend payment and return on assets on cash and cash equivalents. These results imply that stockpiling cash and liquid assets substitutes decreases the value of the firm through market capitalization as they move in opposite direction. Further, highly levered firms may be operating sub-optimally given that the lingering local recession has made borrowing too expensive if not impossible. The study surmised that cash holdings of Nigerian manufacturing firms is significantly influenced by cash flow dynamics and availability of both liquid asset substitutes, market value of the firm and profitability. The study recommends that these firms maintain adequate cash budget and cash flow planning to ensure smooth running of operations, sufficient liquid and near liquid resources to cover maturing loans / debentures, and opt for an optimal liquidity – profitability trade-off at least in the short run given that it boosts the magnitude of both liquidity and profitability.

Keywords: Financial Determinants, Cash Holding, Firm Size.

DOI: 10.7176/EJBM/12-14-06

Publication date:May 31^st 2020