Corporate life cycle and cash holding decisions: A South African study

Abstract

The resource-based view theory suggests that as firms’ resource bases differ along the corporate life cycle, even corporate policies such as cash holdings vary along the life cycle. This study seeks to understand the effect of firm’s life cycle on corporate cash holding behavior. Previous literature has sought to investigate the firm and institutional determinants of corporate cash holdings. Using the resource-based view theory, this study investigates whether corporate life cycle can be another determinant of corporate cash holdings. A panel data analysis of a sample of 112 Johannesburg Stock Exchange (JSE) listed firms from 2011 to 2018 is utilized to determine if firm’s life cycle does influence cash holding behavior. Dickinson’s cash flow analysis is used to proxy life cycle stages and control other known determinants of corporate cash holdings such as firm size, leverage, profitability, dividend payments, and growth opportunities. Contrary to other studies, this study finds no significant relationship between life cycle stages and corporate cash holdings, suggesting that corporate cash holdings for South African firms are driven by other factors other than life cycle resource allocations. However, it is found that prior year cash balances, firm size, and profitability have significant positive relationships with cash holdings. It is also found that liquid asset substitutes, leverage, and investment opportunities exert a significant and negative influence on corporate cash holdings.