Abstract: - The COVID-19 pandemic has introduced substantial uncertainty and economic disruptions, prompting

numerous firms to increase their cash reserves as a significant advantage to enable effective management of

exogenous shocks. Using a sample of 120 non-financial firms listed on the Saudi Stock Exchange between 2012

and 2022, we examine the determinants of cash holdings. By dividing the sample into two sub-periods: pre-Covid

and under Covid and applying the panel data approach, the results show a significant difference between the

determinants of cash holdings of the two groups of firms. During the COVID-19 pandemic, cash holding has

increased with firm size, cash flow, Cost of Capital, and net working capital, while it has decreased with dividend

payment, and return on invested capital. The research provides support for the pecking order theory, indicating that

Saudi firms have maintained relatively stable cash management policies and remained unaffected throughout the

pandemic. This study sheds light on the supportive role of the Saudi government in assisting firms facing liquidity

Received: June 17, 2023. Revised: March 9, 2024. Accepted: April 13, 2024. Published: May 16, 2024.

The continuous growth in corporate cash reserves

worldwide has generated a growing interest among

researchers and scholars, [1], [2], [3], focusing on the

need to study and understand the dynamics of

corporate cash holdings. This part of financial assets

The existing literature on cash holdings has

identified several motives behind firms' decisions to

management was not influenced by the Covid-19

pandemic in Korea. Similarly, [9], reports a negative

relationship between firms’ Covid exposure and cash

holding. Using 3,924 Chinese firms, the authors

show that this negative correlation is observed in

firms that experience high financial frictions and lack

Saudi-listed firms experienced a decrease in their

revenues as well as their investments, [10]. As a

result, the Saudi government has undertaken various

decisions that are designed to provide a favorable

environment for Saudi firms to manage their cash

positions effectively. Therefore, it is crucial to

examine the determinants that influence firms'

decisions regarding cash holdings in response to the

specific measures and initiatives implemented during

the Pandemic.

by Saudi firms to prioritize cash management at the

boardroom level.

Following this structure, we aim to present a

coherent and logical progression of information. In

section 2, we review the relevant theory and develop

the research hypothesis. Section 3 describes the

research methods. Section 4 presents a synthesis of

the key findings and their broader implications, while

the last Section concludes the paper.

financial stability, investment opportunities, risk

management strategies, and the overall financial

health and objectives of the organization. According

to the literature, there are three theories concerned

with cash holding determinants. First, the tradeoff

theory made by [11], argues that firms perceive the

marginal benefits and cost of holding cash to

performance. Furthermore, cash holdings continue to

retain importance for Saudi firms as part of their

overall financial management strategy and risk

mitigation efforts. Therefore, they continually assess

and manage their cash based on their specific

circumstances and financial objectives.

significant roles in determining the level of cash

holdings among these firms. Similarly, [16],

examined the cash holding decisions of Shariah-

compliant firms in six GCC markets during the

period 2005 to 2019. The authors provided support

that the cash holding decisions can be best explained

using the pecking order theory. This result reveals

that Shariah-compliant firms rely on liquid assets as

their first financing option. Based on a sample of the

largest 50 firms listed in the Saudi stock market

dividends. Similarly, [18], investigates how corporate

cash management practices adapt and respond to the

shifts in cash flow uncertainty and financing

challenges that have arisen due to the Covid-19

crisis. The authors found that in 2020, firms impacted

by the Covid-19 crisis responded to heightened

uncertainty by increasing their cash reserves.

Additionally, unaffected firms, which had a large size

and better access to financial markets and internal

capital sources, also exhibited an increase in their

relatively stable operations recognized the

importance of building up cash reserves as a

precautionary measure during uncertain times.

2.2 Determinants of Corporate Cash Holdings

2.2.1 Firm Size

Firm size is a widely examined determinant of a

firm's cash holdings. According to [19], larger firms

typically encounter fewer financial barriers and enjoy

enhanced access to external financing sources. As a

disruptions, opted to reduce or suspend dividend

payments altogether. This decision was driven by the

need to conserve cash and maintain liquidity during a

period of heightened uncertainty. Besides,

Shareholders may have recognized the importance of

cash retention during the pandemic and supported

negative relationship between dividend payout and

cash holding.

2.2.3 Cash Flow

Cash flow and cash holdings are inherently

interconnected. The surplus generated from cash flow

plays a crucial role in determining the firm's cash

holdings. Besides, positive cash flow allows for the

accumulation of cash reserves, which can be used for

investments, meeting financial obligations, and

supporting various operational and strategic

management's inclination to maximize their interests

by accumulating more liquid assets instead of

utilizing them optimally. Therefore, it is proposed

that there exists a positive relationship between cash

flow, and cash holdings, [21].

experienced a significant disruption in cash flow,

including declines in revenue and increases in

expenses. Therefore, holding higher levels of cash

can be useful for navigating these uncertainties,

against short-term financial difficulties. In this

regard, we formulate the following hypothesis:

Hypothesis 3: During COVID-19, there is a positive

interest during a volatile environment and, especially,

during the Covid-19 crisis, [22]. This measure of a

firm's cost of capital presents a combination between

the cost of debt and the cost of equity that firms are

In the Saudi Context, [27] and [28], found that the

Covid-19 pandemic had a negative influence on the

total firm's investments and total revenues. To sum

up, we expect that, during the pandemic, Saudi firms

that face a decrease in return on invested capital may

opt to hold more cash as a precautionary measure. In

Hypothesis 5: During COVID-19, there is a positive

relationship between Return on Invested Capital

and cash holding.

Capital expenditures refer to the funds invested in

long-term assets to support a firm's operations and

generate future income. Generally, capital

investments are made using the available cash or

money borrowed. In this case, the firm's cash

holdings would decrease as it is being a relatively

the two variables during the crisis period.

Regarding capital expenditures and cash holdings

during the Covid-19 pandemic, firms experienced a

decline in cash holdings as they redirected funds

toward capital expenditures. The decision to invest in

capital projects during the pandemic required firms to

allocate cash resources for long-term investments,

which could lead to a decrease in their immediate

cash reserves. This discussion leads to the following

hypothesis:

manage their short-term liquidity requirements.

Thus, the trade-off theory proposes that there is an

inverse relationship between cash and net working

during the COVID-19 period, with the average

declining from 11% to 9%. This result can be linked

to the economic disruptions caused by the pandemic.

It also can be seen that the average WACC decreased

from 8% to 6%. This result proves the effectiveness

of measures implemented by the Saudi government

to mitigate the epidemic and reduce its Outbreak.

Similarly, the results show that the average ROIC

remains unchanged during the two periods, implying

that Saudi firms have quickly adapted to the Covid-

was a result of increased caution and prioritization of

cash preservation, leading to a delay or reduction in

long-term asset investments. Finally, the descriptive

statistics highlight the stability of NWC throughout

the entire study period.

pandemic. We find a significant and positive

correlation, consistent with the findings of [18] and

the predictions of the pecking order theory. Therefore,

our Hypothesis 1 is accepted. Besides, the coefficient

between these variables has increased from 3.2% to

8.5% during the Pandemic. This result confirmed that

before and during the Covid-19 pandemic. Therefore,

our Hypothesis 2 is accepted. This finding is

consistent with the results of [6] and [21] who

observe that firms decrease dividend payments to

retain more earnings internally, leading to an increase

in cash reserves. Similarly, the coefficient between

these variables has decreased from 3.1% to 1.3%.

This outcome confirms the trade-off theory,

suggesting that Saudi firms have preferred to reduce

dividend payments during COVID-19 to hold more

mitigated the risks of the uncertainties of the

pandemic by maintaining higher cash holding through

cash flow and, as a consequence, protecting

themselves against short-term financial challenges.

This finding provides support for the pecking order

theory and converges with that of [8] and [21].

The Weighted Average Cost of Capital exhibits a

positive coefficient during the pandemic. Thus,

Hypothesis 4 is proven. This outcome converges with

that of [24], who explains that investors stipulate

increases the WACC. Consequently, firms must hold

more cash and address the risks associated with

limited access to external financing. More specially,

Additionally, lenders and investors perceive

heightened risks and uncertainties during the COVID-

19 pandemic, resulting in higher borrowing costs to

This empirical study examines the factors influencing

payment recognized an increase in the same period.

However, net working capital and return on invested

capital remained unchanged.

By conducting our regressions on the sub-samples,

the results of the Generalized Least Square regression

indicate that the size of Saudi firms enables them to

adapt rapidly to economic shocks and generate more

consistent and substantial cash flows. In addition,

maintain higher cash holdings.

The coefficient of cost of capital decreased from

8% before the pandemic to 6%, indicating that Saudi

recognized strategic investment opportunities during

the pandemic which, in turn, contributed to an

increase in cash holdings. Overall, our study suggests

that Saudi firms have maintained consistent cash

management practices and have been relatively

unaffected by the outbreak.