Shariah Compliance and Corporate Cash Holdings

40 Pages Posted: 11 May 2020

See all articles by Abdullah salem Bugshan

Abdullah salem Bugshan

Western Sydney University

Faisal Alnori

affiliation not provided to SSRN

Walid Bakry

Western Sydney University

Date Written: November 30, 2019

Abstract

This study investigates the influence of shariah compliance status on firms’ cash holding levels and speed of adjustment in non-financial firms listed in six Gulf Cooperation Council (GCC countries) from 2005 to 2016. It shows that shariah compliance status has a significant effect on firms’ cash holding decisions. Shariah-compliant firms have significantly higher cash holding levels than non-shariah-compliant firms. Further, shariah-compliant firms adjust more quickly to their target cash holdings than do their conventional counterparts. In our view, shariah-compliant firms are subject to multiple restrictions that limit their external financing channels; therefore, holding larger cash reserves is important as such firms are financially constrained and gain from the transaction cost motive of holding cash. The findings of the study have important implications for regulators, investors and managers. To the best of our knowledge, this study is the first to compare the effect of shariah compliance on firms’ cash holdings and speed of adjustment towards the trade-off theory’s optimal cash holding target.

Keywords: Cash holding, Speed of adjustment, Shariah compliance, Islamic finance, Gulf Cooperation Council

JEL Classification: G30, F61, G32, G39

Suggested Citation

Bugshan, Abdullah salem and Alnori, Faisal and Bakry, Walid, Shariah Compliance and Corporate Cash Holdings (November 30, 2019). Available at SSRN: https://ssrn.com/abstract=3581440 or http://dx.doi.org/10.2139/ssrn.3581440

Abdullah salem Bugshan (Contact Author)

Western Sydney University ( email )

Sydney, NSW 1797
Australia

Faisal Alnori

affiliation not provided to SSRN

Walid Bakry

Western Sydney University ( email )

Sydney
1 Parramatta Square, 169 Macquarie Street, Parrama
Sydney, 2751
Australia
2 9685 9372 (Phone)

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