Factors affecting corporate cash holdings: Evidence from the energy sector of Saudi Arabia

Abstract

This study investigates the impact of firm-specific components of cash holdings on the cash reserves of energy firms. Decisions related to cash management are significant and treated as confident made by financial managers to increase the value of a firm. Therefore, financial managers are obligated to hold an optimum level of cash to enhance the firm value. The study depends on secondary data from seven energy firms listed on the Saudi Arabian Stock Exchange over the period between 2014 and 2023. The study considers cash holdings as a dependent variable, leverage, networking capital, and profitability as explanatory variables, and firm size as a control variable. The study employed a linear regression model and a generalized linear regression (GLM) model with Gaussian and Gamma distributions to analyze the data. The results show that Saudi Arabian energy firms reserve approximately 7% of cash, while external financing is 51%. The pooled regression results show that the association between leverage and firms’ cash reserves was negative (–0.064) and significant at less than a 1% significance level. Further, the networking capital and profitability were positively related (0.063 and 0.113) and significant at 5% and 1% significance levels. Moreover, the firm size was positive but insignificant. The generalized linear regression model results with Gaussian and Gamma distributions were similar to the simple linear regression with minor variation. AcknowledgmentThis current project under research project number PSAU/2023/02/25767 was funded by Prince Sattam Bin Abdulaziz University.