Impact of Uncertainty on Cash Holding: Evidence from Manufacturing Firms of Pakistan

Abstract

This study investigates the impact of uncertainty on the cash
holdings of manufacturing firms of Pakistan. It also explores
the impact of uncertainty on cash holdings for financially
constrained firms. We employ dividend payout ratio as a proxy
for classification of financially constrained firms. In order to
mitigate the problem of endogeneity and to take into account
the dynamic nature of the panel dataset, we employ the twostep system-GMM using unbalanced panel dataset of 301 firms
covering the period of 2001 -2015. The results reveal that cash
holdings of firms increase with both macroeconomic and firmspecific uncertainty. However, the increase in cash holding
during higher macroeconomic uncertainty is more than that of
firm specific uncertainty. The reason behind is that firm
specific uncertainty can be hedged while macroeconomic
uncertainty cannot be evaded. The results also suggest that
financially constrained firms further increase their cash holding
while facing both sorts of uncertainty.