The relationship of Uncertainty with cash and inventory holdings

Document Type : Research Paper

Authors

1 Department of Accounting, Faculty of Management, University of Tehran, Tehran, Iran.

2 Accounting, Faculty of Management, Tehran university, Iran

Abstract

 
Previous research has shown that in periods of uncertainty, companies keep more cash to meet their unforeseen contingencies. In fact, uncertainty causes companies to develop non-productive practices such as cash holding. In fact, during periods of uncertainty, senior managers show a more homogeneous behavior because they are unsuccessful in predicting company-specific information, and they cannot necessarily make decisions according to the company's needs. Of course, in this regard, whether short-term or long-term, uncertainty is evaluated, and also the source of uncertainty is effective in the type of managers' reaction.
Also, the existing literature shows that the uncertainty has an effect on the maintenance of the inventory, due to both the increase in information asymmetry, which will cause disruption in the financing of companies, and because it creates fluctuations in the future cash flows of the companies.  This allows the managers with uncertainty about future liquidity  to decide whether to increase their inventory.
In general, uncertainty is a complex issue that, depending on the source of uncertainty, may have different effects on the management decision-making in different fields, which makes the research in this field attractive and interesting.
 
2- Hypothesis
According to the literature, the research hypotheses include:
Hypothesis No. 1: The relationship between global uncertainty index and cash holding is positive and significant.
Hypothesis No. 2: The relationship between global uncertainty index and inventory maintenance is negative and significant.
 
3- Methods
This research was conducted on the companies admitted to the Tehran Stock Exchange during the years 2012 to 2021. Companies whose financial year ends on March 29, have not changed their financial year during the research period, and its information is available. Also, due to the nature of the dependent variable (inventory of goods and cash), banks, insurance institutions, holding companies, and investment companies are excluded from the statistical sample of this research. According to the explanations provided, a total of 112 companies (including 1120 observations) were used to conduct this research, their information was collected from the Comprehensive Database Of All Listed Companies (CODAL) database and also in order to extract the data of the World Uncertainty Index (WUI) from Federal Reserve Economic Data (FRED). Of course, it should be noted that this index is updated every three months on the https://worlduncertaintyindex.com/. In this research, we have implemented Arellano-Bover/Blundell-Bond method, which includes the endogeneity between variables in the model.
 
4-  Results
The results of the hypothesis test indicate the existence of a negative relationship between uncertainty and cash and inventory holding. In other words, with increasing uncertainty, managers keep a smaller amount of these two assets when deciding on the levels of inventory and cash.
 
5-  Discussion and Conclusion
The existence of a negative relationship between uncertainty and cash holding can be explained as Wright (2015) using two measures of short-term uncertainty and long-term uncertainty found that cash holding has a positive correlation with the company's long-term uncertainty. But there is a negative correlation with the short-term and long-term uncertainty of the market, probably managers in Iran do not consider the issues that cause uncertainty as long-term and keep less cash. Of course, it should be kept in mind that as Baum et al. (2008) and Chakraborty et al. (2017) believed, the source of uncertainty can also be decisive in this regard because it can affect the decision-making of managers in different industries in a different way. On the other hand, our results regarding the existence of an inverse relationship between uncertainty and inventory holding support the research of Zeng et al. (2020). In this regard, it can be argued that the uncertainty leads the companies to reduce the inventory; probably the uncertainty, by tightening the financing conditions and increasing the information asymmetry in the financial markets, lead the managers to reduce the inventory level. On the other hand, the results indicate that the managers in Iran convert the funds resulting from the decrease in the inventory into assets other than cash and vice versa. Now, the question can be, to which source the flow of these resources in Iran is likely to be allocated?
 
Keywords: Cash Holding, Inventory Holding, World Uncertainty Index.
 
 

Keywords

References

Ahir, H., Bloom, N., & Furceri, D. (2022). The world uncertainty index (No. w29763). National Bureau of Economic Research.
Al-Najjar, B. (2013). The financial determinants of corporate cash holdings: Evidence from some emerging markets. International Business Review, 22(1), 77-88.
Al-Najjar, B., & Clark, E. (2017). Corporate governance and cash holdings in MENA: Evidence from internal and external governance practices. Research in International Business and Finance, 39, 1-12.
Altig, D., Baker, S., Barrero, J. M., Bloom, N., Bunn, P., Chen, S., ... & Thwaites, G. (2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics, 191, 104274.
Ameer, R. (2010). The role of institutional investors in the inventory and cash management practices of firms in Asia. Journal of Multinational Financial Management, 20(2-3), 126-143.
Anand, L., Thenmozhi, M., Varaiya, N., & Bhadhuri, S. (2018). Impact of macroeconomic factors on cash holdings?: A dynamic panel model. Journal of Emerging Market Finance, 17(1_suppl), S27-S53.
Arellano, M., Bond, S., 1991. Some test of specification for panel data: Monte Carlo evidence and an application to employment equation. The Review of Economic Studies, 58 (2), 277–297.
Ashraf, B. N. (2021). Is Economic uncertainty a risk factor in bank loan pricing decisions? international evidence. Risks, 9(5), 81.
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636.
Baker, S. R., Bloom, N., Davis, S. J., & Renault, T. (2021). Twitter-derived measures of economic uncertainty. Stanford mimeo.
Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do US firms hold so much more cash than they used to?. The Journal of Finance, 64(5), 1985-2021.
Baum, C. F., Caglayan, M., Ozkan, N., & Talavera, O. (2006). The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity. Review of Financial Economics, 15(4), 289-304.
Baum, C. F., Caglayan, M., Stephan, A., & Talavera, O. (2008). Uncertainty determinants of corporate liquidity. Economic Modelling, 25(5), 833-849.
Baum, C. F., Chakraborty, A., Han, L., & Liu, B. (2012). The effects of uncertainty and corporate governance on firms’ demand for liquidity. Applied Economics, 44(4), 515-525.
Bhaduri, S. N., & Kanti, M. (2011). Macroeconomic uncertainty and corporate liquidity: the Indian case. Macroeconomics and Finance in Emerging Market Economies, 4(1), 167-180.
Bloom, N., Bond, S., & Van Reenen, J. (2007). Uncertainty and investment dynamics. The Review of Economic Studies, 74(2), 391-415.
Bontempi, M. E., Frigeri, M., Golinelli, R., & Squadrani, M. (2021). EURQ: A new web search‐based uncertainty index. Economica, 88(352), 969-1015.
Bordo, M. D., Duca, J. V., & Koch, C. (2016). Economic policy uncertainty and the credit channel: Aggregate and bank level US evidence over several decades. Journal of Financial Stability, 26, 90-106.
Caldara, D., & Iacoviello, M. (2016). Measuring geopolitical risk. American Economic Review, 112(4): 1194–1225.
Carpenter, R. E., Fazzari, S. M., & Petersen, B. C. (1998). Financing constraints and inventory investment: A comparative study with high-frequency panel data. Review of Economics and Statistics, 80(4), 513-519.
Choi, S., Ciminelli, G., & Furceri, D. (2023). Is domestic uncertainty a local pull factor driving foreign capital inflows? New cross-country evidence. Journal of International Money and Finance, 130, 102764.
Chowdhury, M. A. F., Meo, M. S., & Aloui, C. (2021). How world uncertainties and global pandemics destabilized food, energy and stock markets? Fresh evidence from quantile on quantile regressions. International Review of Financial Analysis, 76, 101759.
Clance, M., Gozgor, G., Gupta, R., & Lau, C. K. M. (2021). The relationship between economic policy uncertainty and corporate tax rates. Annals of Financial Economics, 16(01), 2150002.
Demir, E., & Ersan, O. (2017). Economic policy uncertainty and cash holdings: Evidence from BRIC countries. Emerging Markets Review, 33, 189-200.
Elsayed, K., & Wahba, H. (2013). Reinvestigating the relationship between ownership structure and inventory management: A corporate governance perspective. International Journal of Production Economics, 143(1), 207-218.
Fang, J., Gozgor, G., Lau, C. K. M., & Seetaram, N. (2022). Does policy uncertainty affect economic globalization? An empirical investigation. Applied Economics, 54(22), 2510-2528.
Ferreira, M. A., & Vilela, A. S. (2004). Why do firms hold cash? Evidence from EMU countries. European Financial Management, 10(2), 295-319.
Fernández-Villaverde, J., Guerrón-Quintana, P., Rubio-Ramirez, J. F., & Uribe, M. (2011). Risk matters: The real effects of volatility shocks. American Economic Review, 101(6), 2530-61.
Gao, J., Grinstein, Y., & Wang, W. (2017). Cash holdings, precautionary motives, and systematic uncertainty. Precautionary Motives, and Systematic Uncertainty, Social Science Research Network, 1-50. Available at SSRN: https://ssrn.com/abstract=2478349 or http://dx.doi.org/10.2139/ssrn.2478349
Geroski, P. A., Machin, S. J., & Walters, C. F. (1997). Corporate growth and profitability. The Journal of Industrial Economics, 45(2), 171-189.
Gozgor, G. (2022). The role of economic uncertainty in the rise of EU populism. Public Choice, 190(1-2), 229-246.
Gozgor, G., Seetaram, N., & Lau, C. K. M. (2021). Effect of global uncertainty on international arrivals by purpose of visits and length of stay. International Journal of Tourism Research, 23(6), 1086-1098.
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
Greene, W. H. (2012), Econometric Analysis, 7th ed, New Jersey, Upper Saddle River: Pearson International.
Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523-564.
Hamm, S., Jung, B., Lee, W. J., & Yang, D. G. (2021). Organized Labor and Inventory Stockpiling. The Accounting Review, 97(2),1-48.
Harford, J., Mansi, S. A., & Maxwell, W. F. (2008). Corporate governance and firm cash holdings in the US. Journal of Financial Economics, 87(3), 535-555.
Islam, S. (2012). Manufacturing firms' cash holding determinants: Evidence from Bangladesh. International Journal of Business And Management, 7(6), 172-184.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.
Jurado, K., Ludvigson, S. C., & Ng, S. (2013). Measuring uncertainty: supplementary material. National Bureau of Economic Research (NBER). working paper, 105(3), 1177-1216
Lang, E., Mager, F., & Hennig, K. (2022). Uncertainty and commercial real estate excess returns in European markets. Journal of Property Research, 39(4), 321-337.
Leahy, J. V., & Whited, T. (1996). The effect of uncertainty on investment: Some Stylized Facts. 28(1),64-83.
Lin, Y., Dong, D., & Wang, J. (2021). The negative impact of uncertainty on R&D investment: international evidence. Sustainability, 13(5), 2746.
Liu, N., & Gao, F. (2022). The world uncertainty index and GDP growth rate. Finance Research Letters, 49, 103137.
Machin, S., & Van Reenen, J. (1993). Profit margins and the business cycle: evidence from UK manufacturing firms. The Journal of Industrial Economics, 41(1), 29-50.
Magerakis, E., Gkillas, K., Floros, C., & Peppas, G. (2021). Corporate R&D intensity and high cash holdings: post-crisis analysis. Operational Research, 22(2), 1-42.
Mathuva, D. M. (2013). Determinants of corporate inventory holdings: Evidence from a developing country. The International Journal of Applied Economics and Finance, 7(1), 1.
Nagar, V., Schoenfeld, J., & Wellman, L. (2019). The effect of economic policy uncertainty on investor information asymmetry and management disclosures. Journal of Accounting and Economics, 67(1), 36-57.
Nguyen, C. (2019). The asymmetry in firms’ mechanisms of cash holdings adjustments: evidence from the G-5 economies. Review of Quantitative Finance and Accounting, 53(2), 429-463.
Orens, R., & Reheul, A. M. (2013). Do CEO demographics explain cash holdings in SMEs?. European Management Journal, 31(6), 549-563.
Pinkowitz, L., Stulz, R. M., & Williamson, R. (2003). Do firms in countries with poor protection of investor rights hold more cash?. National Bureau of Economic Research.
Qin, X., Huang, G., Shen, H., & Fu, M. (2020). COVID-19 pandemic and firm-level cash holding—moderating effect of goodwill and goodwill impairment. Emerging Markets Finance and Trade, 56(10), 2243-2258.
Ramirez, A., & Tadesse, S. (2009). Corporate cash holdings, uncertainty avoidance, and the multinationality of firms. International Business Review, 18(4), 387-403.
Roodman, D. (2007). A short note on the theme of too many instruments. Center for Global Development Working Paper, 125(10.2139).
Song, K. R., & Lee, Y. (2012). Long-term effects of a financial crisis: Evidence from cash holdings of East Asian firms. Journal of Financial and Quantitative Analysis, 47(3), 617- 641.
Wright, I. (2015). Firm Investment and the Term Structure of Uncertainty. SIEPR Discussion Paper. 15-014
Zeng, J., Zhong, T., & He, F. (2020). Economic policy uncertainty and corporate inventory holdings: evidence from China. Accounting & Finance, 60(2), 1727-1757.
Zhang, G., Han, J., Pan, Z., & Huang, H. (2015). Economic policy uncertainty and capital structure choice: Evidence from China. Economic Systems, 39(3), 439-457.
 
 
 
Journal of Accounting Advances
Volume 14, Issue 2 - Serial Number 83
November 2022
Pages 221-251

Files

History

  • Receive Date: 09 January 2023
  • Revise Date: 13 June 2023
  • Accept Date: 22 May 2023

Share

How to cite

Statistics