Cash Holdings Determinants: The Case of Malaysian Local Authorities

Abstract

This paper investigates the determinants of cash holdings by Malaysian local authorities. The researchers seek understanding on the motivation/intention behind the pattern of cash holdings and the theory that may be able to explain why the local authorities hold such amount of cash. Extensive research affirms that organizations in the private sector possess reasons to maintain cash, encompassing transactional, precautionary, and speculative objectives. The pecking order theory, trade-off theory, and free cash flow theory are also significant frameworks that explain why individuals, businesses, and institutions hold cash. However, there has been limited investigation into the factors influencing cash holdings in the public sector, particularly among local authorities in Malaysia. Therefore, relationship between the local authorities’ size, growth opportunities, financing deficits, liquidity, leverage, capital expenditure and access to credit market and cash holdings in Malaysian local authorities is examined. The sample in this study is 37 districts in Malaysia and data is collected from financial statements of the studied districts between 2015 and 2019. Thus, the total observations in this study are 185 districts-years.