Impact of COVID-19 on Corporate Cash Holdings and Speed of Adjustment

Cash management is critical for firm value as both cash surpluses and deficits can diminish value. Consequently, firms aim to maintain optimal cash levels by adjusting their actual cash ratios towards target ratios. Various factors influence cash holdings and the speed of these adjustments. This study examined the impact of the COVID-19 pandemic, which had heightened the precautionary motive for firms to hold cash. The analysis used observations from 159 firms from 2008 to 2022, applying Generalized Least Squares (GLS) regression and the system Generalized Method of Moments (system-GMM) while controlling for industry and year effects. The results indicated that during the COVID-19 period, firms' cash holdings ratios became increased than doubled and the speed of cash ratio adjustment increased by nearly 40% compared to previous years. These findings are consistent with the predictions of pecking order and trade-off theories, extending the existing literature by highlighting the pandemic's role in intensifying firms' financial pressures. The results suggested that the increased cash adjustment speed represented a strategic response to avoid the financial consequences of the COVID-19 crisis.