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Cash holdings in SMEs: speed of adjustment, growth and financing

Author

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  • Cristina Martínez-Sola

    (University of Alicante)

  • Pedro J. García-Teruel

    (University of Murcia)

  • Pedro Martínez-Solano

    (University of Murcia)

Abstract

This paper studies the effect of growth opportunities, financial constraints and financial distress on the speed of adjustment of small and medium-sized enterprises (SMEs) to their target cash holdings. We use a sample of Spanish SMEs from the period of 1998 to 2012. The results support the existence of a target cash holding level to which small firms attempt to converge. Additionally, consistent with the precautionary motive for cash holdings, the results show that SMEs with greater growth opportunities adjust more quickly to their target cash holding level to preserve their financial flexibility and to be able to take advantage of profitable investment opportunities when they arise. Moreover, for SMEs in financial difficulties, the adjustment speed of cash is higher to avoid financial distress costs. Finally, we observe a faster speed of adjustment for cash holding in the crisis period for all firms, as a possible response to the credit restrictions faced by SMEs.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:sbusec:v:51:y:2018:i:4:d:10.1007_s11187-018-9990-y
    DOI: 10.1007/s11187-018-9990-y
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    More about this item

    Keywords

    Cash holdings; Speed of adjustment; SMEs;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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