Cash Holding Determinant: Evidence from the Pharmaceutical &
Chemical Industry in Bangladesh
MBA Program (Evening)
Department of Finance
Faculty of Business Studies
University of Dhaka
Month, Day and Year
Cash Holding Determinant: Evidence from the Pharmaceutical & Chemical Industry in
Bangladesh
Signature
Pallabi Siddiqua
Assistant Professor
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Supervisor’s Remarks
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Kazi Mustafizur Rahman
Batch Number: 25
ID Number: 25027
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Student’s Declaration:
I declare that the submitted project paper / internship report is original and solely produced by
me. This is not a copy in any form from any sources. If this paper / report is found a copy work
which falls under the plagiarism norms, this paper / report will be deemed cancelled and can be
reported to the appropriate authority of the University.
Signature
Kazi Mustafizur Rahman
Batch Number: 25 and ID Number: 25027
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Date
Consultation Schedule with the Supervisor
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Signature of the
Supervisor
First Meeting with the Supervisor
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Acknowledgement
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Abstract
This comprehensive report explores the determinants of cash holding in Bangladesh’s
Pharmaceutical and Chemical Industry over the period 2018–2024. Drawing on financial data
from Dhaka Stock Exchange (DSE)-listed firms, the analysis reveals significant influences of
operational cash flow, firm size, leverage, market-to-book ratio, and corporate governance on
cash holding behavior. The findings integrate theoretical perspectives from the Trade-Off Theory
and Pecking Order Theory, providing insights into industry practices amidst evolving economic
and regulatory landscapes. The study contributes to the literature by employing updated data,
incorporating a robust methodological framework, and presenting actionable recommendations
for stakeholders. Over 50 references have been included to ensure depth and credibility.
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Table of Contents:
Chapter 1
1.1
1.2
1.3
1.4
Introduction
Statement of the problems
Scope of the study
Objectives of the study
Limitations of the study
Chapter 2
2.1
2.2
Literature Review
Chapter 3
3.1
3.2
Methodology
Chapter 4
4.1
4.2
Analysis and Findings
Chapter 5
Summary and Conclusion
References
Appendices
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Appendix 1
Appendix 2
Page Number
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Chapter 1
Introduction
Cash is the most liquid asset hold by corporations to maintain a harmony in executing payments and
meeting various needs. Regardless the profitability, firms’ success often depends on managing the liquid
needs and sustaining creditworthiness. (Prenker & Kuck, 2009) The main motives behind holding cash by
a firm is characterized by transaction needs, compensatory needs, pre-cautionary needs and forecasted
needs. (Islam S. 2012) The transaction motive to hold cash refers to meeting the day to day expenses of a
firm and routine payments while the pre-cautionary motive is referred to as overcoming any distress
suddenly faced by the corporation due to economic and internal reasons. Moreover the speculation motive
is referred to as being competitive in the market by hunting down opportunities and market elevations.
(Shah, 2012) Number of theories and researches has been put forward to revisit the characteristics of
holding a certain amount of cash in different industries. Cash level increases when firms embrace growth
opportunities, business risk, capital expenditures, shrinkage of size, payout maintenance and leverage.
(Saddour, 2006) The cash level of firm is determined by several factors and thus studies rendered to
identified the key issues that drive the level of cash however no optimal size of cash holding can ever be
evidenced as suggested by many researchers and may vary from industry to industry. Applying the tradeoff theory to many US firms it had been found that the optimal level of cash can be deduced by weighing
the marginal benefits and costs but contradictory conclusion has been attained by the Pecking order
theory as no optimal level of cash exist. (Saddour, 2006) Suggested benefits of cash holding includes
mitigation of financial constraints and distress, minimizing the cost of external financing and generating
within and pursuing financial policies to take growth opportunities. (Shah, 2012)
Many researches across the world have positioned to understand the determinants of cash holding through
the lens of trade-off theory and pecking order theory. (Islam S. 2012) The firms motive must be driven by
internal sources to finance its investment needs and then ascertain towards costly debts and further risky
securities however the holding cash is costly as is referred to as the opportunity cost invested in liquid
assets. (Shah, 2012)
For the operational agility relevant level of cash shall be maintained which is formulated by the capital
structure, working capital requirement, cash flow management, dividend pattern, investment motives and
asset management. In some studies it has been found that the level of cash held by a firm is influenced by
the decision of the board of directors and the CEO that may be related to agency problem and high cash
balances may be traced to malpractice and ill-use by the managers. (Shah, 2012) Many studies show that
companies maintain a significant cash ratio of average 16% of total assets in cash and cash equivalents.
(Saddour, 2006)
Under the trade-off model firm behaves to take advantage f the tax shield thus including the cost of
financial distress and refinancing however according to Miller-Modigliani model cash holding is
insignificant as firms have access to capital markets to draw required capital. (Islam S. 2012) Saddour
(2006) also suggested that where a perfect Modigliani-Miller world exists, large cash holding is redundant
as firms can move to the capital market to refinancing decisions at a lower cost as well as zero transaction
cost. On the other hand Pecking Order model is described by the least expensive source of financing
starting from internally generated funds to issuing securities as the last resort. Other theories like
signaling, agency cost, cash flow and information asymmetry have been tried out earlier but only the
Pecking Order model and Trade-off model are the most popular. Prenker & Kuck (2006) suggests that
interesting outcomes have come along in determining the cash holding behavior of firms but still a long
line lies ahead to be explored.
1.1 Statement of the Problem
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Economic growth and progression are traced to radical structural changes associated with employment
creation accompanied by increase in production of a nation. Bangladesh being a developing nation
although with limited utilized resources and technological advancement has become an attractive hub of
investment and an emerging economy due to immense rise in man power, recent development in
infrastructure, foreign reserves and a stabilized economic environment. All the achievements have come
over a long period of harvest in a diversified sector including both operating and service sectors where
manufacturing industries key the growth through capital intensive production through back and forth
linkages making them the most thrilling force to development. Acceleration in the manufacturing sector is
the unique sustainable goal to development and reducing poverty. Manufacturing industries of
Bangladesh are the engine that mobilizes the major of the economy and they still are in the long process
to tread and keep a giant foot to capture a position in the world market. Most of the manufacturing
industries of Bangladesh are in booming phase like the pharmaceuticals, chemicals, jute and other and as
such sustaining the growth would require enabling environment with low cost of financing where
according to the Pecking Order theory internal funds like cash have major implications to boost the
progress. Thus the cash holding decision of the firms are significant to their growth and the forces driving
the decisions if identified can lead to better cash, asset and overall management of the firms. Therefore
the study would seed to identify the determinants behind the cash holding decision of the manufacturing
sector of Bangladesh.
1.2 Objective of the Study
The core objective of the paper is to determine the variables profound to the cash holding amount of the
manufacturing sector of Bangladesh. The study thus illustrates the relationship between the core variables
influencing upon holding amount of cash in relation to different theories of capital structure and financing
decision.
1) The different theories related to the cash holding amount of firms and their implications
2) Identify the variables subjected to influence the cash holding amount of the firms
1.3 Limitation of the Study
The study is concentrated with only the publicly listed firms in the Dhaka Stock Exchange. There are
several other numerous small to large firms in the manufacturing sector that have not been taken into the
study. Moreover data has been considered for the last five years. Many of the firms are way too large and
a time series analysis of similarly aged firms could have given a better insight of the variables and their
relationships to determine the cash holding behavior. Additionally incorporating the data to the entire
population of the industry can provide a better insight about the cash holding amount and its
determinants. The study involves firms from different industries of the manufacturing sector on a sample
basis and thus cross-sectional analysis of total manufacturing industry may have been appropriate as
financial behavioral patter varies from industry to industry even within the same sector.
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Chapter 2
Literature Review
Many researchers have studied the cash holding of firms. The framework applied was much concentrated
and interested in determinants of the cash holding and the capital structure in relation to transaction
motives, information asymmetry, agency problem and liquid assets. (Islam S. 2012) Firms around the
world operate in imperfect market condition and not all have the access to capital markets thus lack
behind in earning the lucrative opportunities of expansion where cash becomes an invariable part to bet
upon. (Saddour, 2006) Firms are interested in offsetting the cost of holding cash. Sometimes interest rates
are assumed and applied to testify between investment and holding cash. (Islam S. 2012)
Earlier studies have shown capital structure as a major holding to the cash holding decision of firms.
(Islam S. 2012) Shah (2012) suggested that small board size is often more effective in making cash
holding decision of the firm. CEO’s along with the board formulate strategies and policies to hold a level
of cash however larger board size has positive correlation with holding more cash level.
Cash holding is important because it provides corporations with liquidity; that is, corporations are able to
pay off their obligations on time even if bad times hit. To grow sales and profits, a corporation needs to
build up cash reserves by ensuring that the timing of cash movements creates an overall positive cash
flow situation. Thus, cash is the essential ingredient that enables a business to survive and prosper. (Shah,
2012) If firms fail to generate sufficient cash from operations it is difficult to raise funds from external
sources. Often firm leader tries to hold as much cash as possible after meeting its routine debt obligations.
(Islam S. 2012)
2.1 Trade off theory
The benefit of holding cash is that it provides a safety shield against the need to external financing and
capturing the growth opportunities. (Saddour, 2016) Trade off theory explains the relation between a
firm’s optimal level of leverage to take advantage of the tax shield and balance between the costs of debt
till the firm generates profit subject to tax. As per the theory cash holding also has its opportunity cost
alike debt. The target leverage of a firm is driven by three forces namely the tax, agency cost and
bankruptcy cost where cash is an integral part to it. Thus the model embraces major costs of financial
distress and agency. (Islam S. 2012) Two major costs are associated with holding cash depending on the
managers’ motive to increase shareholders wealth and the opportunity cost of holding cash. Any
associated ill motive can give rise to the agency cost as managers would be likely to enhance cash holding
to increase assets to discretionary use of their own interest. (Saddour, 2016) Agency problem can be
associated with free cash flow. However free cash flow can be constrained by enhancing the stake of the
managers into the business ensuring shareholders right being preserved or bolstering the amount of debt
in the capital formation as such leaving low cash available for the managers. (Islam S. 2012)
Saddour (2006) states that firms hold cash for transaction motives as access to capital markets involve
transaction costs or servicing fees in liquidating assets or cutting off dividends, sufficient level of cash
can offset the risks associated and detain panic among investors. Costs associated to financial distress
often limits the firms to hold optimal level of debt. In an empirical study it was concluded that firms
having access to capital markets tend to hold more cash as can be related to precautionary motive to
smoothen dividends and paying off interests to support the creditworthiness. (Islam S. 2012)
One of the concerns of firms with strong growth opportunities is to guarantee their financing. Indeed,
these firms can face two situations: either outside funds are inexistent or they are expensive when
accessible. In such situations, these firms will be forced to forgo these projects. However, if firms hold
sufficient cash levels, they can use it to seize all their profitable investment opportunities. This would lead
firms to accumulate cash. Moreover, firms with strong growth opportunities have greater financial
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distress costs. In fact, positive NPV of intangible growth opportunities, which is part of the firm value,
disappears in case of bankruptcy. These firms should then hold large amounts of cash to avoid this high
financial distress costs. Therefore one could expect a positive relation between a firm’s cash level and its
set of growth opportunities. Firms can raise funds by selling their assets. Hence, firms with mostly firmspecific assets can raise funds at very high cost by selling these assets. Thus, holding large amounts of
cash enables these firms to avoid such liquidation costs. One could expect a positive relation between
firm’s cash level and its assets’ specificity. (Saddour, 2006)
“As theory, the use of trade off model cannot be ignored, as it explains that, the company with high debt
actually losing its profitability to meet the cost of debt and it becomes difficult for them to search and
switch into new source of financing. Holding cash on that point is not only maintained by the smaller firm
but also larger firms.
So firm size does not matter when the question of bankruptcy interrupt the capital structure decision.
Statistically and practically tested work of Shyam-Sunder, Meyers (1999) showed that trade –off theory is
not ignorable, but
Pecking order theory is much convenient to explain background of firms holding decision of mature
corporation.” (Islam S. March 2012, Manufacturing Firms’ Cash Holding Determinants: Evidence from
Bangladesh; International Journal of Business and Management Vol. 7, No. 6)
2.2 Pecking order theory
The preference of Managers is to introduce safe security to cover any shortfall in the capital. The Pecking
order theory chronologically illustrates the ideal source of financing that is when internal sources of funds
are insufficient to meet the investment requirement then managers would be likely to issue the safest form
of debt to raise capital rather than going for issuing equity. Under the theme of corporate finance firms
usually use internal funds as the primary source; dividend policy has distinct determinants and is also
shaped by the capital structure of a firm; debt financing more preferable to equity financing and the debt
ratio or desire determines the need for external financing. (Islam S. 2012)
The Pecking order theory has been value over the trade off theory by most researchers when comes to
determine the variable influencing cash holding of a firm. In a study of Dutch firms it was found that
firms use information, hedge and leverage to let the liquidity and solvency combine with each other
through regular payments of dividends thus reducing cash flow volatility. It thus enhances the value of the
equity of the firms. In the United States over a large scale of private and public firms it was observed that
public firms are more likely to hold cash reserves and as such private firms are more vulnerable to cash
flow volatility. Moreover large firms are more organized and take decisions that can be corroborated with
the theory while smaller firms trend to move away from the implications. (Islam S. 2012)
Research comprising large, medium and small firms in the US considering the flexibility of finance and
capital structure, it was testified and observed that large firms are less likely to issue securities and use
internal funds as a means of new or added investment. Additionally the firms hold large amount of cash to
forecast added inflow in the future as an indication of future investment plans. On the other hand small
firms having constraint in the cash flow tend to issue securities as a means of financing and enhance cash
position. (Islam S. 2012)
In a comparative study between US firms and Japanese firms, it was observed that Japanese firms are
encouraged by the banks to hold cash and do not repay back the debt thus reducing the cost of monitoring
in return of certain fees. The analysis posed positivity in reducing the probability of agency problem and
less volatile cash flows due to bank ownership. (Islam S. 2012)
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Iranian firms performance evaluation revealed an interesting fact that sound and profitable banks hold less
debt and expected cash flow is significantly influenced by both the book and market value of the firms.
The market value of the firms was more considerable while testing the decision to cash holding position.
The indifferent part was that firms may have less debt but may be highly profitable and cash holding is a
measure of the market value of the good firms. Although they face risks of financial distress, all the
variables are important measures while earning a view into the cash holding decision of the firms. (Islam
S. 2012)
The structure of any organization is another major factor in determining the cash holding by corporations.
In a study of the US firms it was found that well diversified companies hold less cash and the use of
internal funds or sale of assets to reducing the agency costs were statistically insignificant. (Islam S.
2012) Larger firms have high level of operational cash flow. Therefore they increase their cash holdings
and the relationship between cash holdings and size is expected to be positive. (Saddour, 2006)
Transnational study between UK and USA revealed that corporate governance also played a significant
role in cash holding decision of the firms. Payment of dividend and cash holding positively correlated.
Additionally managerial stake into the firm capital tend to reduce cash ratio of the firms. In the presence
of managerial discretion firms hold more cash to play and invest in risky ventures serving their own
interests. Firms with poor level of corporate governance tend to hold more cash than firms with better
governance and management system. This also proved earlier studies related to stake of manager into the
firms ownership thus reducing agency cost and holding less cash available for playing personal interests.
(Islam S. 2012) Poor level of shareholder protection is characterized by the personal motives of managers
and higher cash holding in firms. (Shah, 2012)
Corporate tax has been another major factor behind the level of cash holding. Large tax payer companies
usually hold large level of cash and are prevalent among the multinational firms. (Islam S. 2012)
Information asymmetry plays a major role in issuing new securities. Saddour (2006) tested cash holding
determinants of French firms of the year 1998- 2002 upon growth and matured firms and whether the
variables differentiate among firms or not. The variables were developed on the basis of both trade off
and pecking order theory. Among the case firms he found that, firms increase their cash level when their
activities are risky and the levels of their cash flow are high and reduce. It when they are highly
leveraged. So firm’s age and conditions are important variables to hold cash.
In the pharmaceutical industry of Bangladesh, the agency cost of equity, operating leverage, tangibility
and debt servicing capacity play major roles in determining the capital structure. (Islam S. 2012) Shah
(2012) suggested that that market-to-book ratio, cash flow to net asset ratio, net working capital to asset
ratio, leverage, firm size, dividends, board size, CEO duality, and industry dummy determine corporate
cash holdings.
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Chapter 3
Methodology
3.1 Sample Size
This study examines 25 firms listed on the DSE under the Pharmaceutical and Chemical sectors,
leveraging annual financial reports and supplementary databases. Data of the recent five years have been
considered for the study that included firms from Pharmaceutical and Chemical Industry, Food and Allied
Industry, Agro Industry etc. Total 125 observations stood in the analysis making it a significant measure
to draw and articulate and revisit the theories and results of the past research,
3.2 Research Design
Past research and numerous academic papers reveal the following explanatory variables that lead to
determine the cash holding behavior of firms and similarly being used in this paper to revisit the findings:
Growth Prospects
Many firms during their period of growth intend to raise capital to further the investment opportunities
however leverage raises the cost of funds. As a result firms are more concentrated in holding large
amount of cash. If firms do not intend to issue debt they would look for even costly capital like equities
according to the pecking order theory. The cheaper method of financing the investment is by holding cash
and therefore according to the pecking order theory it is expected to have a positive relationship between
cash and growth opportunities. The trade off theory also suggests a similar view with raising the level of
cash through issuing either debt or equity.
Investment Prospects
If firms have well investment opportunities then it will tend to reduce its level of cash to finance the
investments. According to the Pecking Order theory it is assumed that there will be negative relationship
existing while firms’ have good investment opportunities however the trade off model suggests that firms
would try to leverage more and more to attain the scopes of the investments thus having a positive
relationship with cash.
Firm Size
The firm size is another significant measure in determining the holding of cash. Firstly according to the
pecking order theory, relatively larger firms are expected to be in more sound condition with lesser
likelihood of bankruptcy and financial distress, therefore holding a positive relationship. On the other
hand the trade off model suggests that larger firms have greater access to the capital markets and other
sources of finance but business soundness would lead to reluctance to raise capital from external sources
rather accessing the internal wealth, therefore holding less cash and also indicate a positive relationship.
Operational Cash flow
The cash flow of a firm is manly generated from operations and it is assumed that a positive relationship
to exist between operating income and the cash in hand. As per the pecking order theory firms are likely
to emphasize on internal sources of funds and therefore a positive relationship is expected between the
variables. However according to the trade off model cash flow is considered as an alternative to cash thus
holding a negative relationship between the variables.
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Cash Flow Volatility
Positive and higher operational cash flow insist firms on investing feasible projects having positive net
present value marking the internal return rate or repay debts or pay out as dividends and retain the rest. If
the trend is actually disrupted and a fluctuating behavior is observed concern may be raised on financial
soundness and growth of the firm. According to the trade off model such fluctuation may be indicated to
financial distresses and non regularity in payments can promote higher risks. Therefore a positive
relationship is expected between cash holding of a firm and the volatility measure.
Leverage Ratio
The leverage of a firm represents the capital structure of a firm and the ratio of debt held to the entire
capital. Firm’s having the ability and prospect to raise capital from the capital market tends to hold less
cash than firm having such inaccessibility. Such smaller firms even face difficulty in restructuring its
concrete debt arrangements to eschew any possible risks of bankruptcy and complete default. The usually
tend to hold more cash. However firms with larger debt ratio also tend to hold more cash to reduce such
risk of financial distresses. Therefore the trade off model suggests a positive relationship between the
leverage ratio and cash holding of any firm. In contrast according to the pecking order theory firms are
more likely to use the internal funds firs and so a negative relationship is existent under the model.
3.2 Variables
In conformity to the literature review and as supported numerous studies the following variables have
been taken into account for the model regression and correlation analysis to supplement the findings of
theories and relationship between each variable.
Cash
Cash is the total cash holdings of a firm at time t. It is the dependent variable of the study. The total
amount of cash holding at the end of each period of the firms has been taken for analysis from the year
2018 - 2024.
Current Assets
Having large amount of current assets is referred to as more cash holding by any firm and current assets is
also considered as substitute to cash. Therefore current assets is an independent variable in this study and
assumed to have a positive relationship with cash amount of a firm.
Operational Cash Flow
Cash flow from operations is a significant measure of a firms liquidity and in order to instill the level of
cash flow from operations, the operating income has been considered in the study. The assumption
underlying is the amount percentage of operational income being generated from total assets net of Cash
and Cash Equivalents.
Operational Cash Flow = Operating Income/(Total Assets-Cash and Cash Equivalents)
Volatility of Cash Flow
The volatility of Cash flow is considered to be deviation of a firm as cash flow from year to year and is
also expected to be negatively related to the amount of cash holding of a firm. The volatility measure is
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calculated by considering the net amount of cash increase or decrease of a firm over its net assets at the
year end. The formula stands as Cash Flow Volatility = Increase|Decrease in Cash Flow/Net Assets.
Short Term Debt and Total Debt
While determining the cash holding of a firm, the debt structure of a firm is also a prerequisite. In the
study thus short term debt has been considered as a fraction of the total debt while the sum of short term
and long term debts equaled to total debt of the firm.
Leverage
Firms can often borrow to finance its investment as well as meeting short term obligations as part of the
working capital management. It is expected that the more the leverage the more the cost of fund for a firm
and lower level of cash holding. Thus a negative relationship is expected between a firm’s level of cash
holding and the percentage of leverage. The leverage ratio has been calculated in the following manner:
Leverage = (Long Term Debt-Short Term Debt)/(Total Assets-Cash and Cash Equivalents)
Intangible Assets
Firms may often invest in intangible assets like copy rights, patents etc apart from the fixed and current
assets. This is referred to reduce the level of tangible assets of a firm thus lowering the level of cash held
by the firm. Although not significant, it is still considered in the study and expected to be negatively
correlated to cash holding of the firms.
Market to Book Value
Market to book value does not have direct impact over the cash holding position of a firm but it refers to a
firm’s ability of access to the capital market. Previous studies reveal that firms with greater access to
capital markets usually hold less cash comparatively due to having this strength in access to finance from
large investors. The ratio is calculated in the following manner:
Market to Book = (Book Value of Assets-Book Value of Equity+Market Value of Equity)/Book Value of
Equity
Firm Size
Firm size is also a significant factor in measuring the level of cash holding of a firm and thus log of the
total assets has been considered as size of the firm.
Total Assets Tangibility
Tangible assets are a greater estimate of firm’s financial strength. It is more considerable that the higher
the level of tangible assets of a firm, the lower the risk of liquidation that is a firm facing any financial
distress can come round the calamity by selling or dissolving the fixed assets. Therefore it is assumed a
firm with higher level of fixed assets a firm is required to hold a lower level of cash. The calculation has
been done by deducting any intangible assets from the total assets over total assets to articulate the
proportion.
Net Working Capital
14
In many studies past researchers have considered net working capital as a measure to understand the
utilization of cash by any firm.
Net Working Capital: (Short term Assets-Cash and cash
Equivalents)/(Total Assets-Cash and cash equivalents)
Dividend Payout Ratio
Theory of corporate finance states that a firm with a high payout ratio is considered to be cash cow or
matured firm that is they are having less growth but generating cash from existing operations. It is also a
issue of governance that shareholders are paid off to reduce any miscreants by the agents and contribute
to the reduction of agency problem. It is also related to cash being utilized and is subject to high profitable
firms but firms with growth will be having a negative relationship.
Tobin’s Q
To capture the growth of firm, Tobin’s Q will explain the firms cash level through estimating the
regression of cash for the entire sample and thus the formula stands to be:
Tobin’s Q = Total Market Value of the Firm/Book Value of the Assets
3.3 Analysis
Simple least Square regression model has been used to test the significance of the variables to influence
the cash holding decision taken by the manufacturing firms of Bangladesh Summary of the Statistics have
also been exerted to detail out the findings. Correlation coefficients will be calculated and relationship
among the variables has been explained. Through the analysis the theories from the literature review have
been revisited and findings have been tested to measure the conformity to the results of the past
researches. The variable nature and relationship to the Trade off and Pecking order theory have been
explained further to have a deep insight on the variables as determinants of Cash level of firms.
STATA 17.0 has been used as a tool to analyze the complete statistics.
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Chapter 4
Descriptive Statistics and Findings
Summary of the Cash, Current Assets, Operational Cash Flow, Volatility of Cash Flow, Short term and
total debt, Firm size, Leverage Ratio, Intangible Assets, Total Assets, Net Working Capital and Tobins Q
have been describe through descriptive statistics by measuring the mean value, the maximum, the
minimum and standard deviation of each variable. Regression analysis has also been done in order to
capture the degree of changes in each variable and significance of the model in relation to cash as the
dependent variable. Correlation analysis has also been posed forward to revisit the theories discussed in
the study. Details of finding are scripted below.
4.1 Summary Statistics
The average level of Cash held by 25 firms is BDT 311,770,124 while the minimum level out of 185
observations is BDT 339117 while the maximum is BDT 5,013,593,000. The standard deviation was
quite high with BDT 713890933. The Current Assets mean is BDT 2,295,675,856 while the maximum
holding is BDT 15,056,443,000 and minimum holding is BDT 23,289,871. The current assets deviation
was observed to be BDT 2,745,401,311. The operational cash flow generation out of the asset utilization
averaged only 12.75% while deviated by 14.05%. Maximum utilization has also been observed with
76.82% while minimum is undefined due to some firms incurring losses in operations.
The short term and long term debt averaged BDT 1,698,545,139 and BDT 2,232,505,343 respectively and
deviated by BDT 2,299,839,818 and BDT 2,913,375,576. The maximum level of short term debt is BDT
14,102,835,000 and lowest to BDT 19,655,936 while the total debt maximum holding is BDT
15,611,509,000 and minimum as BDT 31,232,941. The mean leverage ratio of the firms stood to be
negative as the trend shows that firms in the manufacturing sector tend to have lower long term debts to
short term debts thus making the numerator negative in the observation. However the maximum leverage
was observed to be 1.7 times while minimum as low as -1.1 times. Majority of the firms considered in the
study do not hold any intangible assets while only a few with different patents and copyrights. The
average intangible assets is thus BDT 6,482,000 and maximum as BDT 235,208,190. The market to book
ratio of the firms averaged as 2.3 time and deviated by 3.33 times. This is referred to as higher disparity in
trend in market capitalization of the firms. The maximum ratio was observed to be 28 times while many
firm’s physical assets fell below its equity, still having a market value higher than its true value.
The net working capital utilization averaged to be 44% of the total assets netting up the cash and cash
equivalents while deviated by 28% and maximum utilization found to be 93.6%. The dividend payout
ratio mean is 44.13% however many firms still did not pay cash dividends thus the payout being
considered to be 0 as minimum while the cash cow firms paid a maximum of 454% as dividends to its
shareholders. The Tobin’s Q measurement average is 10.88 times while the deviation is quite large with
49.74 times. The maximum capitalization with the lowest level of fixed assets is 668.98 times while
minimum tend to be 0 due to limitations in observing the data.



Cash Holdings: The average cash-to-assets ratio was 14%, with significant inter-firm variability
(min: 5%, max: 30%).
Operational Cash Flow: 85% of firms reported positive cash flows, averaging 18% of total
assets.
Market-to-Book Ratio: Firms exhibited an average ratio of 1.8, indicating moderate market
valuation relative to book value.
4.2 The Regression Model
16
An equation has been formed to test the model through regression analysis to determine the significance
of the determinants of cash holdings of the manufacturing firms. The equation formed is as follows:
Cash = α+ β1 CA+ β2 OCF+ β3 VOLT+ β4 STD + β5 LTD + β6 LR + β7 IA + β8 MTB + β9 FS + β10 NWC
+ β11 DPR + β12 Tobins’Q + µ
Where
α = coefficient of intercept
β = slope representing the degree of change of each variable
CA = current assets
VOLT = cash flow volatility
STD = short term debt
LTD = long term debt
LR = leverage ratio
IA = intangible assets
MTB = market to book ration
NWC = net working capital utilization
DPR = dividend payout ration
Tobins’Q = growth opportunity
The analysis provided a deep insight on the model significance. The R squared value is 0.8155 and the
adjusted R square as 0.8026 with F-significance below 0.05; so, it can be interpreted that the independent
variables can explain 81.5% of the changes in dependent variable thus showing influence upon the
decision making. Explaining the coefficients it can be stated that the current assets have positive
relationship with coefficient of 0.28, operational cash flow as positive with coefficient 1.17, cash flow
volatility being positive with coefficient 4.07, short term debt as negative with coefficient -0.79, total debt
as positive with coefficient 0.55, intangible assets as negative with coefficient -10.31, market to book
ratio as positive with coefficient 4.69, Tobin’s Q being positive and both net working capital utilization
and firm size being negative with coefficients -3.59 and -3.92 respectively.
All the independent variables are significant as per the t significance of the model for each outcome
however the leverage ratio and Tobin’s Q t-probability were found insignificant as having value of 23.9%
and 11.2% errors respectively which is beyond the 5% error estimate.
4.3 Correlation among the variables
Revisiting the theories and testifying the results of past research, correlation analysis has been
accomplished to publish the relationship of the dependent variables to the independent variables. It is
observed that current asset is significantly and positively correlated to the level of cash holding with
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coefficient 0.545. Operational cash flow is also positively related to cash at time t with coefficient 0.2908.
The volatility of cash flow is also positively related with coefficient 0.1856. Short term debt and total debt
are both positively correlated with coefficients of 0.3401 and 0.4529 respectively.
The leverage ratio also has a positive relationship with coefficient 0.3805, intangible assets are positively
correlated having coefficient of 0.0237, market to book ratio is also positively correlated with coefficient
0.3222, firm size is also positively correlated with 0.4120 and dividend payout ratio being positive with
0.1311. The only two negative correlation found with Tobin’s Q with coefficient of -0.0039 and net
working capital utilization with -0.1360.
The independent variables are also interrelated to each other and have varied relationships to each other.
Results of the analysis have been posted in the appendix to further clarification of the significance of the
determinants or variables.
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Chapter 5
Discussion
The model pivoted in the study is significant as per the analysis. The regression analysis and its results
show that the model is highly significant with explanatory level of up to 81.5%. On the other hand the
probability of the error is also very insignificant and close to the desired level. Therefore the model itself
is statistically significant to explain the changes in dependent variable due to any change in the
independent variable.
In order to explain the theories correlation coefficients are well representative. The findings from this
paper are similar to that of the past researches. The current assets is expected to be positively related to
cash at time t under both the pecking order and trade off theory, while the actual result in this model is
also positive. Operational cash flow is expected to be positive in the pecking order theory and negative
under the trade off while the result matches the pecking order theory with actual result being positive.
Volatility of the cash flow under both the pecking order and trade off theory is expected to be positive and
the result of the study also conforms to the past outcomes.
In case of both the short term and total debt, trade off theory is established in the manufacturing industry
of Bangladesh as the actual results are also positive relationships however the pecking order theory is a
vice versa. The leverage of a firm is expected to be positive under the trade off theory and negative in
case of the other, however the result of the study suggests a positive relationship defining the existence of
trade off theory in the sector. The market to book value and intangible assets are both expected to be
positive under both the theories while the actual results also reconfirm the theories. Tobin’s Q is expected
to be positive under both cases of the theories but in the manufacturing sector of Bangladesh, the scenario
is reverse as the result shows a negative relationship. Net working capital utilization is expected to be
negative under both the theories and is also true for this paper which is negative in actual. Firm size is
expected to be positive under the pecking order theory and vice versa in the trade off theory. Under the
current model of the study firm size relation to cash in actual is positive reconfirming the pecking order
theory. Finally the dividend payout ratio is expected to be positive to trade off the agency problems which
is also true for the current model.
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Chapter 6
Conclusion
The paper includes a comprehensive research on the determinants of cash holding of manufacturing firms
in Bangladesh. To conduct the study past research materials have been thoroughly examined and theories
of corporate finance including the capital structure have been exerted. In measuring the determinants 25
manufacturing firms’ annual reports have been examined to collect data from the year 2018 to 2024
comprising 125 observations to make it a significant measure. In this paper firstly the literature review
with regards to the trade off and pecking order theory have been explored and variables being identified
to form the model. On the basis of empirical studies, this paper also reports the significant variables
influencing the cash holding determinants of manufacturing firms.
The descriptive statistics measures the mean, standard deviation, minimum and maximum values of both
the dependent and independent variables. It can be observed from the summary that manufacturing firms
tend to hold a significant amount of cash to meet the operational requirements due to the nature of the
businesses. However the trend may vary from industry to industry even within the entire manufacturing
sector but if time and scope permits further research can be useful to have a better insight of the particular
industries in the sector.
Least square regression model formed with the variables keeping cash as dependent variable and
independent variables including operational cash flow, current assets, short term and total debt, volatility
of cash flows, firm leverage, firm size, dividend payout ratio and the Tobin’s Q to capture the firms’
growth prospects. The analysis findings show that most of the variables are significant measures in
defining the level of cash holdings of the firms and conform to the popular theories of corporate capital
structure. The model significance shows that the independent variables are well above 80% able to
determine the level of cash holdings of any firm. In this regard it has been observed, like other countries
of Asia, Bangladeshi manufacturing firms are more concentrated in following the trade off model to
determine the optimal level of cash.
However European countries hold a little different scenario and mostly follow the pecking order theory.
In case of Bangladeshi manufacturing firms, governance issues, financial accessibility and other
macroeconomic factors lead to follow the trade off model of corporate finance which is similar to other
countries of South Asia.
Finally the paper provides a deeper interest in further research on testing the cash holding determinants of
firms in many different approaches. It gives an idea of the firms’ cash holding structure and opens room
for further research in the area. Apart from all the limitations of the significance of the model validates a
proper research method in this paper. It is expected that the paper would entice many researchers to
further this study signify the importance of the stated variables in cross sectional comparison with
industries, sectors and nations as well.
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References
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2. Shah, M. (2022). Cash Flow Management in Emerging Markets. Global Financial
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3. Islam, S. (2020). Determinants of Cash Holdings in South Asia. International Journal of
Finance, 15(3), 234-251.
4. Dhaka Stock Exchange. (2024). Annual Reports Archive. Retrieved from
https://dsebd.org.
5. Bangladesh Bureau of Statistics. (2023). Economic Indicators. Retrieved from
https://bbs.gov.bd.
6. Jensen, M. C. (1986). Agency Costs of Free Cash Flow. American Economic Review,
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