The Impact of Inflation Rate and Operating Cycle on Cash Holdings of Firms

Abstract

The Cash is the vital source of any economic unit. Maintaining a balance between available cash and cash needs is one of the most important factors of economic health and activity continuity of the business units. In addition, due to the inflation situation that exists, most of Iranian firms prefer to convert their cash into other assets. Although, such a common phenomenon is considered as resistance shield against inflation, the secondary effect of this is that the firms become helpless in the debt maturity and the reputation of the organization will be hurt. The main objective of this study is to investigate the impact of inflation rate and operating cycle on cash holdings of listed firms on the Stock Exchange of Iran. To achieve this goal, a sample consisting of 80 firms listed on the Tehran Stock Exchange, during the years 2006 to 2014, is studied. To verify the hypotheses, multiple regression method is used. The results of testing the hypotheses demonstrate that the operating cycle and inflation have a significant impact on cash holdings. This can be a sign of the firm's response to inflation. That is to say, at the time of inflation, firms tend to keep more cash, rather than exchanging the cash to other assets and when the operating cycle is high, firms tend to reduce cash holdings in the firm to other assets that will lead to the firm's profitability.