DETERMINANTS OF PRECAUTIONARY CASH HOLDINGS: THE IMPORTANCE OF RISK MANAGEMENT AND CORPORATE GOVERNANCE

Purpose. The main purpose of this study is to determine the drivers of a firm’s precautionary cash holdings, related to risk management and corporate governance factors. We add to the evident gap in the existing literature on cash holdings with a novel approach acknowledging the importance of the precautionary motive of holding cash in excess. Method. We apply the original research approach, merging historical survey-based data on the motives behind holding idle cash in Polish listed firms, and the accounting based and hand collected data on risk management and corporate governance. Using a regression model, we investigate the interplay between precautionary cash holdings and a range of literature-guided variables on risk management and corporate governance. Results. We have found that greater precautionary cash is held by firms exposed to a greater operating risk, with more sophisticated risk management, stronger supervisory board and dispersed ownership. Our results also demonstrate that a consideration of motives behind holding idle cash highlights the interlinks with risk management related drivers, which was not visible in prior works based on measurement of volume of cash holdings in a firm.