IDEAS home Printed from https://ideas.repec.org/a/eee/jocoma/v28y2022ics2405851321000702.html
   My bibliography  Save this article

Oil price volatility and corporate cash holding

Author

Listed:
  • Bugshan, Abdullah

Abstract

Since it is believed that oil price movements highly influence economic growth in oil-rich countries, this study examines the influence of oil price volatility on corporate cash holdings and adjustment speed and tests whether firms in the petrochemical industry are affected differently from firms in other industries. This study addresses these research questions using static and dynamic system GMM models on a sample of non-financial firms listed in Gulf Cooperation Council (GCC) countries between 2005 and 2019. The results of this study assert that oil price volatility has a significant impact on cash-holding decisions. Specifically, the study displays a positive and significant relationship between oil price volatility and firms' cash holdings. Again, the study discovers that firms adjust towards their target cash-holding level faster during high oil price volatility than during periods of low oil price volatility. Consistent with the trade-off theory, the study unveils that precautionary motive is a crucial factor motivating firms to retain large amounts of cash. The results also showed that firms in the petrochemical industry have a higher cash-holding ratio than firms in other industries. These results support the view that oil price volatility exposes oil-related industries to a higher uncertainty than other industries. Moreover, the findings are robust to an alternative measure of oil price volatility and model specifications.

Suggested Citation

  • Bugshan, Abdullah, 2022. "Oil price volatility and corporate cash holding," Journal of Commodity Markets, Elsevier, vol. 28(C).
    • Handle: RePEc:eee:jocoma:v:28:y:2022:i:c:s2405851321000702
    DOI: 10.1016/j.jcomm.2021.100237
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S2405851321000702
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcomm.2021.100237?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gao, Huasheng & Harford, Jarrad & Li, Kai, 2013. "Determinants of corporate cash policy: Insights from private firms," Journal of Financial Economics, Elsevier, vol. 109(3), pages 623-639.
    2. Lee, Chi-Chuan & Lee, Chien-Chiang, 2019. "Oil price shocks and Chinese banking performance: Do country risks matter?," Energy Economics, Elsevier, vol. 77(C), pages 46-53.
    3. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2003. "International Corporate Governance and Corporate Cash Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 111-133, March.
    4. Wang, Yong & Xiang, Erwei & Cheung, Adrian (Wai Kong) & Ruan, Wenjuan & Hu, Wei, 2017. "International oil price uncertainty and corporate investment: Evidence from China's emerging and transition economy," Energy Economics, Elsevier, vol. 61(C), pages 330-339.
    5. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    6. Vinod Venkiteshwaran, 2011. "Partial adjustment toward optimal cash holding levels," Review of Financial Economics, John Wiley & Sons, vol. 20(3), pages 113-121, August.
    7. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
    8. Ian Wright, 2015. "Firm Investment and the Term Structure of Uncertainty," Economics Working Papers 15104, Hoover Institution, Stanford University.
    9. Lee, Kiseok & Kang, Wensheng & Ratti, Ronald A., 2011. "Oil Price Shocks, Firm Uncertainty, And Investment," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S3), pages 416-436, November.
    10. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2011. "Liquidity Management and Corporate Investment During a Financial Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1944-1979.
    11. Saumitra Bhaduri & Mrinal Kanti, 2011. "Macroeconomic uncertainty and corporate liquidity: the Indian case," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 4(1), pages 167-180.
    12. Mohaddes, Kamiar & Pesaran, M. Hashem, 2017. "Oil prices and the global economy: Is it different this time around?," Energy Economics, Elsevier, vol. 65(C), pages 315-325.
    13. Al-Khazali, Osamah M. & Mirzaei, Ali, 2017. "The impact of oil price movements on bank non-performing loans: Global evidence from oil-exporting countries," Emerging Markets Review, Elsevier, vol. 31(C), pages 193-208.
    14. Cook, Douglas O. & Tang, Tian, 2010. "Macroeconomic conditions and capital structure adjustment speed," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 73-87, February.
    15. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2011. "Access to Liquidity and Corporate Investment in Europe during the Financial Crisis," Review of Finance, European Finance Association, vol. 16(2), pages 323-346.
    16. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    17. Dayanandan, Ajit & Donker, Han, 2011. "Oil prices and accounting profits of oil and gas companies," International Review of Financial Analysis, Elsevier, vol. 20(5), pages 252-257.
    18. Orlova, Svetlana V. & Rao, Ramesh P., 2018. "Cash holdings speed of adjustment," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 1-14.
    19. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    20. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29, National Bureau of Economic Research, Inc.
    21. Henriques, Irene & Sadorsky, Perry, 2011. "The effect of oil price volatility on strategic investment," Energy Economics, Elsevier, vol. 33(1), pages 79-87, January.
    22. Sheridan Titman & Sergey Tsyplakov, 2007. "A Dynamic Model of Optimal Capital Structure," Review of Finance, European Finance Association, vol. 11(3), pages 401-451.
    23. Venkiteshwaran, Vinod, 2011. "Partial adjustment toward optimal cash holding levels," Review of Financial Economics, Elsevier, vol. 20(3), pages 113-121, August.
    24. Baum, Christopher F. & Caglayan, Mustafa & Stephan, Andreas & Talavera, Oleksandr, 2008. "Uncertainty determinants of corporate liquidity," Economic Modelling, Elsevier, vol. 25(5), pages 833-849, September.
    25. Baum, Christopher F. & Caglayan, Mustafa & Ozkan, Neslihan & Talavera, Oleksandr, 2006. "The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity," Review of Financial Economics, Elsevier, vol. 15(4), pages 289-304.
    26. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    27. Ian Wright, 2015. "Firm Investment and the Term Structure of Uncertainty," Discussion Papers 15-014, Stanford Institute for Economic Policy Research.
    28. Muncef Guizani, 2017. "The financial determinants of corporate cash holdings in an oil rich country: Evidence from Kingdom of Saudi Arabia," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(3), pages 133-143, September.
    29. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    30. Merton H. Miller & Daniel Orr, 1966. "A Model of the Demand for Money by Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(3), pages 413-435.
    31. Xu, Nianhang & Chen, Qinyuan & Xu, Yan & Chan, Kam C., 2016. "Political uncertainty and cash holdings: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 276-295.
    32. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71(3), pages 219-219.
    33. Phan, Dinh Hoang Bach & Tran, Vuong Thao & Nguyen, Dat Thanh, 2019. "Crude oil price uncertainty and corporate investment: New global evidence," Energy Economics, Elsevier, vol. 77(C), pages 54-65.
    34. Phan, Dinh Hoang Bach & Tran, Vuong Thao & Nguyen, Dat Thanh & Le, Anh, 2020. "The importance of managerial ability on crude oil price uncertainty-firm performance relationship," Energy Economics, Elsevier, vol. 88(C).
    35. Mohn, Klaus & Misund, Bård, 2009. "Investment and uncertainty in the international oil and gas industry," Energy Economics, Elsevier, vol. 31(2), pages 240-248, March.
    36. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
    37. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    38. Alnori, Faisal & Alqahtani, Faisal, 2019. "Capital structure and speed of adjustment in non-financial firms: Does sharia compliance matter? Evidence from Saudi Arabia," Emerging Markets Review, Elsevier, vol. 39(C), pages 50-67.
    39. Demir, Ender & Ersan, Oguz, 2017. "Economic policy uncertainty and cash holdings: Evidence from BRIC countries," Emerging Markets Review, Elsevier, vol. 33(C), pages 189-200.
    40. Lv, Xin & Lien, Donald & Yu, Chang, 2020. "Who affects who? Oil price against the stock return of oil-related companies: Evidence from the U.S. and China," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 85-100.
    41. Mr. Heiko Hesse & Mr. Tigran Poghosyan, 2009. "Oil Prices and Bank Profitability: Evidence From Major Oil-Exporting Countries in the Middle East and North Africa," IMF Working Papers 2009/220, International Monetary Fund.
    42. Sorana Vătavu & Oana-Ramona Lobonț & Iulia Para & Andrei Pelin, 2018. "Addressing oil price changes through business profitability in oil and gas industry in the United Kingdom," PLOS ONE, Public Library of Science, vol. 13(6), pages 1-22, June.
    43. Yujun Lian & Mohamad Sepehri & Maggie Foley, 2011. "Corporate Cash Holdings and Financial Crisis: An Empirical Study of Chinese Companies," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 112-124, December.
    44. Wei, Yanfeng & Guo, Xiaoying, 2017. "Oil price shocks and China's stock market," Energy, Elsevier, vol. 140(P1), pages 185-197.
    45. Abdulrahman Alhassan, 2019. "Oil Price Volatility and Corporate Decisions: Evidence from the GCC Region," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(9), pages 2057-2071, July.
    46. Orens, Raf & Reheul, Anne-Mie, 2013. "Do CEO demographics explain cash holdings in SMEs?," European Management Journal, Elsevier, vol. 31(6), pages 549-563.
    47. Miguel A. Ferreira & Antonio S. Vilela, 2004. "Why Do Firms Hold Cash? Evidence from EMU Countries," European Financial Management, European Financial Management Association, vol. 10(2), pages 295-319, June.
    48. Maghyereh, Aktham & Abdoh, Hussein, 2020. "Asymmetric effects of oil price uncertainty on corporate investment," Energy Economics, Elsevier, vol. 86(C).
    49. Orlova, Svetlana V. & Sun, Li, 2018. "Institutional determinants of cash holdings speed of adjustment," Global Finance Journal, Elsevier, vol. 37(C), pages 123-137.
    50. Bugshan, Abdullah & Alnori, Faisal & Bakry, Walid, 2021. "Shariah compliance and corporate cash holdings," Research in International Business and Finance, Elsevier, vol. 56(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lee, Chien-Chiang & Wang, Chih-Wei & Thinh, Bui Tien & Purnama, Muhammad Yusuf Indra, 2023. "Cash holdings and cash flows: Do oil price uncertainty and geopolitical risk matter?," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 134-152.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Demir, Ender & Ersan, Oguz, 2017. "Economic policy uncertainty and cash holdings: Evidence from BRIC countries," Emerging Markets Review, Elsevier, vol. 33(C), pages 189-200.
    2. Fryderyk Mirota & Natalia Nehrebecka, 2018. "Determinanty transakcyjnej rezerwy płynności w spółkach giełdowych w Polsce," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 3, pages 75-102.
    3. Davide Dottori & Giacinto Micucci, 2018. "Corporate liquidity in Italy and its increase in the long recession," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(3), pages 981-1014, December.
    4. Efstathios Magerakis & Konstantinos Gkillas & Athanasios Tsagkanos & Costas Siriopoulos, 2020. "Firm Size Does Matter: New Evidence on the Determinants of Cash Holdings," JRFM, MDPI, vol. 13(8), pages 1-35, July.
    5. Abdul Rashid & Maryam Ashfaq, 2017. "Financial Constraints And Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 1-26, June.
    6. Gupta, C.P. & Bedi, Prateek, 2020. "Corporate cash holdings and promoter ownership," Emerging Markets Review, Elsevier, vol. 44(C).
    7. Qazi Awais Amin & Tom Williamson, 2021. "Firms cash management, adjustment cost and its impact on firms’ speed of adjustment: a cross country analysis," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 53-89, January.
    8. Cristina Martínez-Sola & Pedro J. García-Teruel & Pedro Martínez-Solano, 2018. "Cash holdings in SMEs: speed of adjustment, growth and financing," Small Business Economics, Springer, vol. 51(4), pages 823-842, December.
    9. Maurizio Rocca & Raffaele Staglianò & Tiziana Rocca & Alfio Cariola & Ekaterina Skatova, 2019. "Cash holdings and SME performance in Europe: the role of firm-specific and macroeconomic moderators," Small Business Economics, Springer, vol. 53(4), pages 1051-1078, December.
    10. Zhang, Xiang & Zhang, Zongyi & Zhou, Han, 2020. "Oil price uncertainty and cash holdings: Evidence from China," Energy Economics, Elsevier, vol. 87(C).
    11. Fryderyk Mirota & Natalia Nehrebecka, 2020. "Dynamika dostosowań transakcyjnej rezerwy płynności przedsiębiorstw do poziomu optymalnego," Bank i Kredyt, Narodowy Bank Polski, vol. 51(6), pages 613-638.
    12. Quoc Trung Tran, 2020. "Corporate cash holdings and financial crisis: new evidence from an emerging market," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 271-285, June.
    13. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    14. Sun, Wenyi & Yin, Chao & Zeng, Yeqin, 2023. "Precautionary motive or private benefit motive for holding cash: Evidence from CEO ownership," International Review of Financial Analysis, Elsevier, vol. 90(C).
    15. Efstathios Magerakis & Konstantinos Gkillas & Christos Floros & George Peppas, 2022. "Corporate R&D intensity and high cash holdings: post-crisis analysis," Operational Research, Springer, vol. 22(4), pages 3767-3808, September.
    16. Elyasiani, Elyas & Movaghari, Hadi, 2022. "Determinants of corporate cash holdings: An application of a robust variable selection technique," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 967-993.
    17. Orlova, Svetlana V. & Sun, Li, 2018. "Institutional determinants of cash holdings speed of adjustment," Global Finance Journal, Elsevier, vol. 37(C), pages 123-137.
    18. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    19. Hou, Canran & Liu, Huan, 2020. "Foreign residency rights and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 64(C).
    20. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jocoma:v:28:y:2022:i:c:s2405851321000702. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcomm .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.