Impact of banking relationships and ownership concentration on corporate cash holdings in India

Abstract

PurposeThis study aims to investigate the impact of banking relationships and ownership concentration on corporate cash holdings (CCH) in 333 Indian micro, small and medium-sized enterprises (MSMEs) for nine years (2011–2020).Design/methodology/approachThe authors use system generalized method of moments approach to examine the impact of banking relationships and ownership concentration on CCH.FindingsThe paper finds that the firm's number of banking relationships share a concave (inverted U-shaped) relationship with the cash holding levels. Initially, the positive relationship may signal weak creditworthiness of MSMEs or be a consequence of bank free-rider monitoring issues. The negative effect after a certain level shows that the competition among banks reduces the firm's financial constraints and therefore makes the firms hoard less cash. The authors also document an inverse relationship between ownership concentration and cash holdings. The authors' results suggest that the presence of large shareholders acts as efficient monitors, reducing the risk of potential agency conflicts and thereby managerial entrenchment resulting in lower cash levels. This association remains unchanged for MSMEs in the service sector. However, the quadratic association between banking relationships and CCH vanishes in the presence of a service sector dummy in the regression model. The authors find a significant positive linear relationship in this regard.Originality/valueTo the best of the authors' knowledge, this is the first paper that studies banking relationships and ownership concentration as determinants of Indian MSMEs.