Ownership structure and corporate cash holdings in Jordan: the role of government ownership

ABSTRACT

Using a dataset of 107 listed firms in Jordan from 2009 to 2018, we employed the generalized method of moments (GMM) to examine the effect of ownership structure on the level of corporate cash holdings. We found that higher government ownership is associated with higher cash holdings. On the other hand, different forms of ownership, namely block holding and individual and foreign ownership, were found to be insignificant. We further examined why firms in Jordan hold cash, concluding that when the level of government ownership rises, firms do not employ cash reserves for investments nor for dividend payments, which in light of governmental political purposes could be a clear indicator of agency problems.

KEYWORDS:

• Ownership structure
• corporate cash holdings
• government ownership
• GMM estimation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ In order to prevent a structure break in the data due to the consequences of the COVID-19 pandemic, the study period excludes the years following 2018.

² The basic tenet of accelerator theory is that any increase in a firm’s output or sales necessitates a corresponding rise in investment to bring its stock of capital up to the necessary level. The accelerator model makes the logical assumption that any increase in a company’s sales level indicates that it is likely to make more profits and use more of its current capital in the future; as a result, if firms anticipate that the sales stream will continue, this will encourage them to spend more money on capital, and thus hold more cash. A multiplier effect would result from the increased capital stock as more sales and profits would follow, and vice versa.

³ Several studies have used this variable to assess the effectiveness of financial intermediation at the national level (Agapova & Vishwasrao, 2020; Anton, 2021; Feyen & Zuccardi, 2020). Furthermore, Agapova and McNulty (2016) suggest that in contrast to net interest margin, the bank lending-deposit spread is a superior measure of the efficiency of financial intermediation between countries; they offer empirical support for this claim in the context of European economies. A low value of this variable suggests low transaction costs, which makes it easier for companies to obtain financing. On the other hand, a high lending-deposit spread (or inefficient financial intermediation) suggests borrowing limitations and high financing costs for corporate borrowers (higher loan rates). Furthermore, higher bank lending-deposit spreads result in reduced deposit rates, forcing companies to use their own financial resources (and hence increase their cash holdings) rather than depositing their savings.

⁴ Inconsistent difference-GMM estimates are likely if the lagged dependent variable coefficient is between OLS (upwardly biased) and fixed-effect (downwardly biased) estimates, with a tendency towards the latter.

Additional information

Notes on contributors

Ahmad Alkhataybeh

Ahmad AlKhataybeh is an Associate Professor of Investments & Finance at Yarmouk University. He has a Ph.D. in Finance and an MSc in Investments from the University of Birmingham. He is currently the vice dean of the faculty of business at Yarmouk University. He formerly worked as a senior economic advisor at BDO International and as a consultant for the World Bank.

Safaa Adnan AlSmadi

Safaa Adnan Alsmadi is an associate professor of accounting at Yarmouk University, she holds a Ph.D. in Accounting from the University of Southampton. Safaa's research area includes financial accounting, auditing and corporate governance. Prior to working at Yarmouk University, she used to work at the Central Bank of Jordan.

Alaaeddin Al-Tarawneh

Alaaeddin Al-Tarawneh is an Associate Professor of Economics at the University of Jordan, he holds a Ph.D. in Financial Economics from the University of Birmingham. He is currently the Director of the internal audit and control unit at the university of Jordan.

Mohammad A. Khataybeh

Mohammad A. Khataybeh is an Associate Professor of Finance at the University of Jordan, he holds a Ph.D. in Financial Economics from the University of Birmingham. He is currently the Assistant director general and the director of insurance liquidation at Jordan Deposit Insurance Corporation.

Mohammad Ziad Shakhatreh

Mohammad Ziad Shakatreh is an Associate Professor in Accounting at the Faculty of business at Yarmouk University, He holds a PhD in Accounting from the University of Turin, MSc and MSc in Accounting form Yarmouk University.