The Impact of Cash Holdings on Firm Performance: Panel Evidence from Textile Sector Companies Listed on the Pakistan Stock Exchange (2016–2025)

Abstract

This paper investigates the effect of cash holdings on the financial performance of textile firms listed on the Pakistan Stock Exchange (PSX) from 2016 to 2025. The cash management policy of firms has been discussed in the literature for many years. On one hand, cash serves as insurance against expensive outside financing (Myers & Majluf, 1984; Opler et al., 1999), but on the other hand, cash gives managers the ability to indulge in discretionary spending that decreases firm value (Jensen, 1986). The Pakistani textile industry, which is the biggest export earner and one of the most leveraged industries in Pakistan, constitutes a good sample through which to revisit this question, since the majority of studies conducted in Pakistan about cash holdings have investigated the determinants of cash holding rather than the effects, while few others have stopped at the mid-2010s. In this study, we used a hand-verified dataset of 20 firms listed on the PSX in the textile industry with 198 firm-year observations after cleaning the data and estimating pooled OLS, fixed effects, and random effects models of ROA on cash holdings, firm size, leverage, and firm age. Statistical tests (Breusch-Pagan LM test, Modified Wald test, and Wooldridge test) identify firm-specific random effects, heteroskedasticity among firms, and first-order autocorrelation, which are controlled using firm-clustered standard errors. On the other hand, the Hausman test supports the Random-Effects specification (χ²(4) = 7.97, p = 0.093). However, results for Fixed Effects are also provided as a robustness check. The relationship between cash and ROA is positive but statistically insignificant in all specifications. Leverage is found to have a highly significant negative impact on profitability in all specifications (p < 0.01), while firm size and firm age are significant only in the Fixed-Effects specification. These results imply that, in an economy where the availability of capital is limited and banking plays an important role as a source of finance, and also where the levels of cash are low (i.e., in Pakistan), having more liquid cash by the firm is not an important factor in determining its profitability—capital structure decisions, especially leverage, are far more important.

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