Managerial ability and corporate cash holdings adjustment speed in South African listed firms

Abstract

ORIENTATION: There is little evidence on how managerial traits influence corporate cash holdings decisions. RESEARCH PURPOSE: The study investigated the relationship between managerial ability (MA) and the speed of adjustment of corporate cash holdings back to their optimal levels. RESEARCH DESIGN, APPROACH AND METHOD: A quantitative research approach was used by deploying the two-step generalised method of moments (GMM) and the system-GMM estimations to test how MA influenced corporate cash holdings speed of adjustment (CH-SOA). The study sample consisted of 143 non-financial firms listed on the Johannesburg Stock Exchange (JSE) for the period from 2000 to 2020. MOTIVATION FOR THE STUDY: While prior studies have found that managerial ability drives corporate decisions and performance, there remains a dearth in empirical studies linking managerial ability with CH-SOA. MAIN FINDINGS: This study found evidence of the existence of optimal cash holding levels and that the average speed of partial adjustment is 75.6% for South African firms. However, the speed of adjustment was lower in firms managed by highly able managers. PRACTICAL IMPLICATIONS: The study has practical implications for managers, particularly, low-ability managers, who can learn how their more able counterparts manage and adjust cash holdings. Policy makers can clearly observe how different institutional and macroeconomic conditions affect business proclivity to making or delaying investments by holding cash. CONTRIBUTION: The study provides new evidence on how MA influences CH-SOA. Previous cash holdings studies have ignored the role of MA. Additionally, we provide evidence of the existence of optimal corporate cash holding levels using data from South African firms. We find that firms partially adjust any deviations from the optimal levels considering firm-specific, institutional and macroeconomic conditions.