Cash holding and bankruptcy risk in Egyptian firms: the moderating effect of corporate social responsibility

Abstract

Purpose

This study aims to investigate the impact of cash holding (CH) on bankruptcy (BR) risk. This study also examines the moderating effect of corporate social responsibility (CSR) practices on this relationship.

Design/methodology/approach

The data were extracted from firms' annual reports. The panel data were used for 68 firms listed at the Egyptian Stock Exchange (EGX) with a total of 340 observations from 2015 to 2019. The research hypotheses were tested using the panel corrected standards errors (PCSE) method and the feasible generalized least squares (FGLS) method.

Findings

The results reveal that (1) CH has a positive effect on the Z-score (decreasing bankruptcy risk) of the Egyptian listed firms. (2) Egyptian firms that practice CSR have a low level of bankruptcy risk. (3) CSR practices in Egyptian listed firms support the positive relationship between CH and Z-score (declining bankruptcy risk).

Research limitations/implications

The limitations of this study include a relatively small sample size. In addition, the analysis doesn't include other measures of bankruptcy risk due to a lack of data.

Practical implications

The findings of this study will help investors and creditors to evaluate and predict the firms' bankruptcy risk. This study highlights the importance of cash holding for firms in emerging economies. Firms may hold cash to support liquidity, overcome financial distress risk, lower the cost of capital, increase future investment opportunities and reduce uncertainty. Additionally, the results would also help the policymakers, regulators at the EGX and Financial Regulatory Authority and stakeholders to realize the importance of cash holding, evaluate the cash liquidity in Egyptian listed firms, predict the firms' financial distress and consider the consequences of the CSR practices in accordance with Egypt's vision 2030.

Originality/value

Consistent with liquidity preference theory and trade-off theory, this study adds evidence to the literature on bankruptcy risk by investigating the effect of cash holding on bankruptcy risk in emerging economies. According to Egypt's vision 2030, the empirical findings in this study extend previous findings by providing strong additional evidence in emerging economies regarding the moderating effect of CSR practices on the association between cash holding and bankruptcy risk. To the best of our knowledge, this study is the first to investigate the relationship between CSR, CH and BR risk in Egypt.

Citation

Sayed, E. and Khalil, M. (2022), "Cash holding and bankruptcy risk in Egyptian firms: the moderating effect of corporate social responsibility", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-02-2022-0049