Cash or crash? The diversification game and corporate cash holdings in India

Purpose - This paper aims to explore how corporate diversification influences corporate cash holdings (CCH) in India. It also assesses CCH behavior and its determinants during crisis, stability and recovery periods. Design/methodology/approach - The study uses the system generalized method of moments (System GMM) on 1684 non-financial firms listed on the National Stock Exchange during 2002–2022. Further analyses are carried out for group-affiliated firms based on investment cash flow sensitivity, agency costs and debt capacity. Findings - The findings show that firm diversification (at the group level) results in a roughly 6% fall in cash ratio, thereby implying that diversified firms (diversified business groups) hold lower cash levels than specialized firms. The reduced cash balances are attributed to the financially unconstrained nature of diversified business groups, higher debt capacity, good governance behavior and active internal markets. Additionally, the authors observe a time-varying cash policy for diversified firms, with mean cash holdings being 2% higher during crisis periods. Moreover, the findings reveal that the inverse relationship between diversified firms and CCH is less pronounced for unrelated diversified firms (2% fall in cash ratio) than related diversified firms (5% fall in cash ratio). Originality/value - To the best of the authors’ knowledge, this is the first study to examine the relationship between corporate diversification and CCH in India during both crisis and non-crisis periods. The authors’ research uniquely uses System GMM on a large sample and differentiates between related and unrelated diversification.