On the Determinants of Cash Holdings for Unlisted SMEs

This study examines the relation between cash holdings of the Korean Unlisted SMEs and the set of financial factors identified, in extant research, to be significant in determining cash holdings for the Listed firms. Since a typical SME is operated by Owner-Manager and has limited access to the capital market, the analysis in this study does not incorporate those factors associated either with diversities in corporate ownership structure or with idiosyncrasies in corporate governance structure. However, this study is distinct from contemporary Korean studies in that the factors examined include Zscore, which stands for an important feature of SME sustainability, as well as such traditional determinants like size, growth, debt/equity ratio, level and variability of cash flows, and working capital turnover period. A total of 18,055 firm/year data, the sample in this study, consist of 5 year (2001～2005) financial data for 3,611 firms whose annual sales not exceeding 60 billion WONs (approximately €31.6 million equivalents). The results of the fixed effects regressions indicate that higher cash holdings are associated with bigger size, more favorable growth potential, lower debt/equity ratio, higher level of cash flows, more variable cash flows, shorter working capital turnover period, and finally higher Zscore. Zscore is based on the model modified by Scherr and Hulburt(2001) and employed in Garcia-Teruel and Martinez-Solano(2008). As far as the sampled firms are concerned, the results collectively seem to suggest that Korean SMEs with high cash holdings demonstrate characteristics of operationally and financially sound firms. This study possesses one more distinctive feature. A preliminary analysis does not register a significant relation between cash holdings and debt/equity ratios, although the sign of the relation is negative. However, the negative relation becomes statistically significant in an extended set of tests which try to control potential non-linearity in the relation as reported in Guney et al.(2007). The findings reported in this study seem to point out that cash holdings are symptomatic of either the degree of freedom from financial encumbrance or long-term sustainability allowed to Korean SMEs which enjoy limited access to the capital market. SMEs may simply not be in a position to weigh the opportunity costs of cash against the costs related to survival.