Capital market is imperfect in reality. All firms including both large corporations and small and medium enterprises (SMEs) are subject to financial constraints. Hence they hold cash or cashable assets that yield almost zero returns. Among others, pre...
Capital market is imperfect in reality. All firms including both large corporations and small and medium enterprises (SMEs) are subject to financial constraints. Hence they hold cash or cashable assets that yield almost zero returns. Among others, precautionary motive or pecking order theory seem to be most appropriate for explaining SMEs’ cash holdings since cash holding has an insurance effect. In this study, we empirically show that ROE or ROA is higher for SMEs, when they hold more cash. From the results we can infer that SMEs can enjoy higher chance of protection of poor performance through the insurance effect of cash holdings.