5 ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 | 5-36
DETERMINANTS OF CASH HOLDINGS IN 
PRIV ATE FIRMS: THE CASE OF THE SLOVENIAN 
SMES
MARIJA ANGELOVSKA
1
 Received: September 12, 2016 
ALJOŠA V ALENTINČIČ
2
 Accepted: August 26, 2019
ABSTRACT: This paper examines the determinants of cash holdings in a large sample of 
the Slovenian small and medium sized companies in the period 2006-2013. The empirical 
results provide support for the transactions and precautionary motives in the cash policies 
of the analysed SMEs. However, we find evidence in favour of the speculative motive as 
well, by ascertaining that smaller, exporting and more profitable firms hold more cash. The 
paper also establishes that the net working capital and financial debt can be considered as 
cash substitutes and that keeping close relationships with banks reduces agency costs and 
information asymmetries and leads to lower cash levels. In addition, the ability to internally 
generate funds expressed as higher operating cash flow reduces the amounts of cash held. 
Finally, evidence shows that longer cash conversion cycles and requirements for mandatory 
retirement benefit contributions result in higher cash balances, while weaker empirical 
support is found also for the negative influence of the interest rate level on cash holdings.
Key words: cash holdings, liquidity, financial Crisis, SMEs, Panel data
JEL classification: G10, G32, L25
DOI: 10.15458/ebr95
1 INTRODUCTION
Managing cash is an important component of a company’s financing policy, especially in 
the case of small businesses, which are often more dependent on short-term financing 
sources (Peel, Wilson & Howorth, 2000; Walker & Petty, 1978). The old phrase ˝cash 
is king˝ is particularly descriptive of small and medium-sized companies, considering 
they face much more limited access to external financing compared to that which larger 
companies have access to (Mramor & Valentinčič, 2003). In addition, the recent financial 
crisis has put cash and its management back in the spotlight. When liquidity is scarce, 
efficient cash management is vital for ensuring that every spare monetary unit has been 
fully utilized (Nason & Patel, 2016). Even in good times, an adequate cash policy is crucial 
for the company as lack of liquidity may result firstly, in the company’s inability to settle its 
liabilities as contracted or as economically efficient, secondly, in its increased costs, and, in 
1 Corresponding author: University of Ljubljana, School of Economics and Business, Ljubljana, Slovenia, PhD 
Student, e-mail: missmari06@gmail.com
2 University of Ljubljana, School of Economics and Business, Ljubljana, Slovenia, e-mail: aljosa.valentincic@
ef.uni-lj.si

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 6
the worst case, insolvency. As a result, the management of cash holdings often marks the 
difference between corporate failure and success. Cash holdings in general represent “cash 
on hand or readily available for investment in physical assets and to distribute to investors” 
(Gill & Shah, 2012) and it is considered a liquid asset necessary to support the day-to-day 
operations and the working capital needs of a company. 
The purpose of this study is to investigate the determinants of cash holdings in small and 
medium-sized companies in Slovenia. These are the companies which employ fewer than 
250 persons with an annual turnover not exceeding EUR 50 million and/or an annual 
balance sheet total not exceeding EUR 43 million (European Commission, 2003). We 
assume that companies behave prudently when it comes to liquidity and postulate that 
the transactions and precautionary motive prevail when deciding on the level of cash to 
hold. Based on the that, it is posited that small and medium-sized enterprises (SMEs) 
tend to lower their costs related to securing liquidity, utilize their cash substitutes at hand 
and accumulate cash as a buffer against difficult circumstances. The study also seeks 
to examine the effect of the recent financial crisis and the consequent stringent credit 
conditions on the cash holdings behaviour of Slovenian SMEs. All the study hypotheses 
rest on the specific characteristics of SMEs, which are outlined in the following paragraph. 
A large sample of 27,573 unique small and medium-sized firms during the period 2006-
2013 for a total of 170,220 firm-year observations is used.
Small and medium-sized enterprises play a central role in the EU economy as a whole, 
nevertheless, they represent a sector of even greater importance for the economic 
development of Slovenia, which makes it a particularly interesting choice of country for 
the purpose of examining the characteristics of SMEs. According to the Annual Report 
on the European SMEs 2014/2015 (European Commission, 2015), there were 22.3 million 
SMEs in the non-financial business sector of the 28 European Union Member states in 
the year 2014, accounting for 99.8% of all enterprises in this sector, providing 67% of total 
employment and 58% of the sector’s value added (or EUR 3.7 trillion in absolute value). As 
reported in the 2015 SBA Fact Sheet (European Commission, 2015), it is estimated that in 
Slovenia the SMEs constituted 99.8% of all non-financial business entities, accounting for 
circa 73% of employment and providing 63% of the value added in the local non-financial 
sector in 2014. According to our data analysis, cash holdings represent a significant part of 
the asset base of the Slovenian SMEs as they average around 18% of their net assets, which 
is much higher than the average 6% found in Spanish SMEs (García-Teruel & Martínez-
Solano, 2008) and the average 5% found in Portuguese SMEs (Pastor and Gama, 2012). 
One of the crucial differences between public and private firms is their respective 
ownership structure. While the ownership of private firms is in the hands of just one 
or a few owners, public firms’ ownership is divided among thousands of shareholders. 
The coincidence between ownership and control in smaller firms provides managers 
with greater flexibility in changing the asset base and consequently the risk of the firm 
(Pettit & Singer, 1985). Furthermore, private businesses are usually characterized by 
greater informational opacity, which contrasts with the comparable, informationally 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 7
transparent publicly listed companies. This fact exacerbates the information asymmetry 
problems (Berger & Udell, 1998). As a result of the aforementioned characteristics, private 
businesses face more serious agency costs of debt (Pettit & Singer, 1985), and what is more, 
it makes smaller firms more susceptible to temporary economic downturns, resulting 
from the higher transaction costs these firms encounter and the consequently shorter 
maturity debt they use (Tittman & Wessels, 1988). Finally, smaller firms are challenged 
with more severe financing constraints, arising from their limited internal finance, the 
information asymmetry they bear and presumably due to the lack of collateral to support 
their borrowing (Whited, 1992).
Strong support is established for both the transactions and precautionary motive 
respectively in the cash policies of the firms studied in our sample, however, there is also 
evidence found on the presence of the speculative motive. More specifically, the results of 
our research show that smaller firms tend to hold higher levels of cash, thus mitigating 
the potential costs for obtaining external finance. In the same vein, we find that keeping 
close relationships with banks provides a buffer, leading to lower cash levels, and that in 
addition, cash substitutes such as net working capital and debt are indeed utilized as such. 
Furthermore, higher ability for generating funds internally, expressed within the research 
as operating cash flow generated, is negatively related to the amounts of cash held. Weak 
empirical support for the negative influence of the interest rate level on cash holdings is also 
established. The reported evidence further shows that longer cash conversion cycles and 
mandatory retirement benefit contributions requirements result in higher cash balances, 
implicating that precaution drives the cash policy in financially constrained firms. The 
finding that exporting and more profitable firms hold more cash implies the speculative 
motive, rather than the precautionary one, drives the decision to keep the cash holdings 
“in-house” in order to be able to take advantage of profit-making opportunities.
The results of our research make several contributions to the existing literature on cash 
holdings. First, our analysis establishes new and so far untested factors as determinants of 
cash holdings, as among others the export activities and the requirement for mandatory 
retirement benefit contributions. Furthermore, to our knowledge this is the first paper 
that addresses the effect of the recently changed interest rate climate on the cash amounts 
held by companies. Another important contribution of our analysis is that the research 
focuses on cash holdings of small and medium sized (and generally private) companies, 
representing a sector that has thus far received relatively little attention by researchers 
compared to the extensive literature available on cash policies in large companies listed on 
capital markets. Thus, our paper builds on the existing though limited body of knowledge 
devoted to a sector of great significance to the global economy. Lastly, no empirical 
studies regarding determinants in the field of cash holdings for small and medium-sized 
companies in Slovenia have been carried out so far, despite the fact they constitute the core 
of the country’s economy. 
The remainder of this paper is structured as follows. Section 2 provides the theoretical 
foundations and develops the empirical hypothesis, while Section 3 describes the data 

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 8
set and the methodology used. In Section 4 results are discussed, in section 5 additional 
robustness tests are presented, while section 6 provides a conclusion to the research and 
its findings.
2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
2.1 Reasons and motives for holding cash
Firms hold a certain amount of cash holdings on their balance sheets for various reasons 
and purposes. The two main motives for doing so are indicated in the current literature 
as the transactions motive and the precautionary motive respectively. The first of the two, 
the transactions motive, arises from the firm’s need of a certain amount of cash balances 
necessary for covering payments related to their day-to-day business operations. Keynes 
(1936) defines the transactions motive as “the need of cash for the current transaction 
of personal and business exchanges” . By securing cash for these purposes, the company 
avoids or reduces transaction costs associated with raising external finance. As shown by 
Miller and Orr (1966), higher transaction costs prompt firms to hold more liquid assets. 
On the other hand, the precautionary motive for holding cash relates to a firm’s intention 
of protecting itself against uncertain future events. To hedge against uncertainty, firms 
make cash reserves to meet future eventualities which would require sudden spending 
in times of poor cash flow. Almeida, Campello and Weisbach (2004) demonstrate the 
precautionary demand for cash is present in financially constrained firms which show 
significant propensity to save cash out of their cash flows, whereas unconstrained firms do 
not. Nevertheless, during the financial crisis, both constrained and unconstrained firms 
demonstrated a significantly increased propensity to save cash (Sun and Wang, 2015). 
In addition, McLean (2011) finds the precautionary motive significantly increased its 
presence in general among the American share issuing companies in the period between 
1971 and 2008.
Another reason for holding cash lies in ensuring flexibility, in other words, it concerns the 
objective of exploiting unforeseen opportunities. The latter is called the speculative motive, 
where firms keep speculative cash on their accounts to seize profit-making opportunities 
in the future, typically resulting from price volatility. What is more, speculative cash 
balances provide the firm with the possibility to purchase assets at attractive prices at 
any time (Michalski, 2009). In this respect, it may appear similar to the precautionary 
motive for holding cash, as both these motives deal with uncertainty, however, there is an 
important difference. Namely, the precautionary demand for cash arises from uncertainty 
in the timing of payments and receipts between the current and future purchase or sale of 
an asset, while the speculative motive relates to the uncertainty in interest rates (Whalen, 
1966; Sprenkle, 1969).

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 9
An additional motive for holding cash identified by Miller and Orr (1966) is the 
compensating balance requirement. Namely, firms are required to hold a certain minimum 
amount of cash on their current accounts, where the amount is not allowed to fall below a 
certain predefined level, and is used as a form of compensation to the bank instead of the 
company paying the bank its service charges. More specifically, compensating balances 
are a form of an agreement between a commercial bank and a business customer in which 
the bank opens a line of credit in favour of the same customer and in return demands an 
average minimum cash balance to be maintained in the deposit account of the business 
customer.
Being able to benefit from trade discounts can also be considered a reason for keeping 
cash on hand. It is often the case that suppliers offer their clients the option of discounts 
on early payment of obligations, a situation which would easily be obtainable if there was 
extra cash deposited in the firm’s account (Ehrhardt, 2006). Kling, Paul and Gonis (2014) 
conclude that cash holdings improve the access to trade credit by sending a positive signal 
to the suppliers regarding the ability to pay back the trade credit offered.
2.2 Implications of holding cash
Holding cash has its implications, in the form of both benefits and costs. The two main 
benefits of having cash on hand are tightly linked to the two main motives for holding 
cash, i.e. the transactions and precautionary motive respectively. With regard to the 
former motive, it is by holding cash that the firm avoids transaction costs necessary to 
raise funds for making payments, it avoids the trouble of liquidating assets, issuing debt 
and/or equity, renegotiating existing financial contracts or cutting dividends (Opler et al., 
1999; Ozkan & Ozkan, 2004). Relating to the latter of the two motives, by keeping cash 
in the company account, the company secures liquid assets to finance its operations or 
favourable investment projects in cases when other resources are limited, unavailable or 
too costly to acquire. In other words, cash holdings do not only reduce the possibility of 
financial distress and the costs associated with it, but also improve the position towards 
desired investment activities and minimize the costs of being dependent on external 
funds (Faulkender & Wang, 2006; Gill & Shah, 2012; García-Teruel & Martínez-Solano, 
2008). In the light of the foregoing, benefits of cash holdings are especially emphasized in 
financially constrained firms, i.e. firms facing difficulties in obtaining external financing. 
Denis and Sibilkov (2009) state that constrained firms place higher value on cash holdings 
for two reasons, the first of them being (i) because cash holdings enable constrained firms 
to increase investment, and the second one (ii) because the marginal profitability of an 
investment project is higher for the constrained firms compared to the unconstrained 
ones.
The costs associated with holding cash include among others lower rates of return, possible 
tax disadvantages and agency costs of free cash flow. The most obvious cost of holding cash 
arises from the fact that cash generates lower return compared to other investments of the 

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same risk (Dittmar et al., 2003). Consequently, by holding on to its cash, the firm forgoes 
more productive investments and thus incurs opportunity costs of not investing in some 
other income earning assets (Whalen, 1966; García-Teruel & Martínez-Solano, 2008). 
Another view on the opportunity costs of cash provided by Almeida et al. (2004) is that 
greater cash holdings necessitate reductions in existing, profitable investment projects.
Tax disadvantages might occur as a result of a higher corporate tax rate compared to the 
personal tax rate levied on interest income. Taking that into account, investors are in a 
more prosperous position if they hold on to the excess cash instead of the firm (Faulkender 
& Wang, 2006). In a different view provided by Foley, Hartzell, Titman, and Twite (2007), 
the American  multinationals face tax costs associated with repatriating foreign income 
which is why they choose to leave the cash abroad and instead accumulate foreign cash 
holdings in their foreign affiliates.
Holding higher levels of cash in the firm can nevertheless be a trigger for agency costs 
of managerial discretion due to conflict of interest between shareholders and managers. 
Namely, managers have the incentive to accumulate cash and channel it for purposes that 
might be damaging or disadvantageous to the interests of shareholders. This is emphasized 
especially in cases when the firm generates large free cash flows, defined as “cash flow 
in excess of that required to fund all projects that have positive net present values when 
discounted at the relevant cost of capital” (Jensen, 1986). In the presence of free cash flows 
in firms where ownership and control are represented by two distinct bodies, managers 
might be inclined to hold higher levels of cash on the account of several possible reasons, 
some of which may be (i) to reduce company risk, or (ii) to pursue their own personal 
objectives and interests, (iii) to avoid making payouts to shareholders and instead keep 
the cash in the company. On the contrary, the situation is different in small and medium-
sized companies where management and control generally coincide, thus making conflicts 
among them practically non-existent or seldom (García-Teruel & Martínez-Solano, 2008; 
Garrod, Kosi & V alentinčič, 2008; Kosi & V alentinčič, 2013; Szczesny & V alentinčič, 2013). 
2.3 Empirical studies on determinants of cash holdings
As mentioned in the previous paragraph, the majority of studies on cash holdings deals with 
the question of determining their factors in the setting of large publicly traded companies, 
while only a few papers deal with the problem of determinants of cash holdings in private 
firms and even fewer focus on small and medium-sized businesses (SMEs). The first to 
fill that void is Faulkender (2002), who studied the cash policies of small businesses and 
discovered that costs of financial distress and information asymmetries play a significant 
role in determining the cash positions of American small firms. Among the latter, higher 
cash balances are found with firms which expect to encounter difficulties in obtaining 
external funds in the future, in firms which conduct more research, as well as in higher 
leveraged firms, together providing evidence for the precautionary motive. The last result 
of the study is however contrary to the finding of Opler et al. for large public companies 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 11
(1999), suggesting important differences in the relative costs and benefits of cash balances 
for these two groups of companies. Furthermore, Faulkender (2002) reasserts the 
economies of scale in holding cash by observing that cash holdings decrease with firm 
size, a factor previously established for large public companies only.
In a subsequent study conducted on a sample of Spanish small and medium-sized firms, 
García-Teruel and Martínez-Solano (2008) show that these firms maintain a target level 
of cash which is higher for firms with better growth prospects and higher cash flows. In 
contrast, this target level is lower in times of higher interest rates, increased bank debt and 
higher liquidity. Interestingly, SMEs demonstrate a higher speed of adjustment towards 
their optimal cash levels compared to large firms. The reason might lie in the fact that 
SMEs are subject to greater information asymmetries and agency problems related to debt 
compared to larger firms, thus the costs of being further away from the optimal cash levels 
are higher for them as well.
Results similar to the above ones are reported and developed further by Pastor and Gama 
(2013) by adding the relationship with banks and debt structure as significant factors which 
influence the cash holdings of Portuguese SMEs. The negative impact of bank relationship 
on the amount of cash held suggests that maintaining close contact with banks helps lessen 
the information asymmetry problems regarding the use of financial debt, which is more 
emphasized in SMEs. Furthermore, long-term debt is associated with lower cash holdings, 
in this respect giving support to the transaction motive.
Orens and Reheul (2013) report that CEO demographics play an important role in 
structuring the liquidity policy in Belgian SMEs. Their findings suggest that CEOs who are 
longer tenured, older and experienced in one industry only, place more emphasis on the 
precautionary motive and are less concerned with the opportunity cost of cash, which is 
why they prefer higher cash holdings compared to shorter tenured, younger and diversely 
experienced CEOs.
Bigelli and Sánchez-Vidal (2012) study the factors that determine the cash holdings of 
Italian private firms which coincide mainly with the ones of public firms. Similar to Opler 
et al. (1999), they show that significantly larger cash positions are found in smaller and 
riskier firms, while less cash is held by firms with more net working capital, viewed as its 
substitute. In the same vein, lower cash levels are found in firms with a higher proportion 
of bank debt, as also reported by Ferreira and Vilela for large public European Monetary 
Union companies (2004). In addition, Bigelli and Sánchez-Vidal (2012) note that firms 
facing longer cash conversion cycles, lower financing deficits and lower effective tax rates 
hold significantly higher levels of cash.
Gao, Harford and Li (2013) conducted a large sample comparison of cash policies between 
public and private American firms to find that private firms hold approximately half as 
much cash compared to public firms, owing to the greater agency problems present in 

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 12
the latter group of firms. In contrast, Hall, Mateus and Bezhentseva Mateus (2014) find 
the opposite situation when they compare public and private firms in Central and Eastern 
Europe. They find that privately held companies maintain higher levels of cash, most 
probably due to the precautionary motive. As private firms have limited access to capital 
markets, they hold on to higher cash levels as a buffer against future financial distress. 
2.4 Research questions
The motives and implications for holding cash are the starting point in devising the research 
questions of this study. In addition, the hypothesis development rests on a number of 
previously established explanations on the level of cash held in companies. The following 
paragraphs elaborate on the firm characteristics which have already been recognised as 
determinants of cash holdings in previous literature, and are further complemented in the 
survey by introducing certain novel explanatory variables.
Firm size has been determined in a considerable amount of research as a significant factor 
that affects the cash level. As there are transaction costs related to raising funds from 
external sources, which are fixed no matter the amount borrowed, it is assumed that there 
are economies of scale in raising funds (Faulkender, 2002). It is therefore relatively costlier 
for smaller firms to obtain funds from external sources, which can be a cause for retaining 
more cash in their accounts. In the case of small and medium-sized companies, several 
other factors related to their size need to be considered, as indicated by García-Teruel 
and Martínez-Solano (2008). Namely, SMEs are subject to more serious information 
asymmetries, face more financial constraints and are more susceptible to financial distress, 
all of which lead to fixed costs relatively higher for smaller firms than for the large ones. As 
a consequence, an inverse relationship between size and cash holdings is expected, taking 
into account both the transactions and precautionary motives.
Another firm characteristic influencing the amount of cash holdings is the cash flow 
generated by the company. There are two opposing explanations regarding the effect of the 
cash flow magnitude on cash levels. According to the financing hierarchy model presented 
by Myers and Majluf (1984), firms with high cash flows will hold more cash because they 
prefer to fund profitable investment projects with internally generated funds rather than 
raising external capital due to information asymmetries. This is contrary to Kim et al. 
(1998), who see a negative relation between cash flow and cash holdings in the sense that 
cash flow presents a ready source of liquidity. Therefore, if the transaction motive prevails, 
we hypothesize that higher cash flows lead to lower cash levels. On the other hand, where 
the precautionary motive is the main cash decision driver, we hypothesize a positive 
relation between these two variables.
The speculative motive brings about the question on how growth opportunities influence 
the level of cash retained in the company’s accounts. If a company foresees profitable 
investment projects, then it will do its best not only to avoid cash shortages, but also to 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 13
have enough resources to fund those projects when the moment to invest comes. This is 
even more emphasized for small firms as their access to external financing is more limited 
and can also be assigned to the precautionary motive. For this reason, it is expected that 
stronger growth opportunities result in higher cash holdings, as shown in various empirical 
studies (Opler et al., 1999; Ferreira & Vilela, 2004; Ozkan & Ozkan, 2004).
Leverage can be considered as an indicator of a firm’s ability to generate external funds, 
but it can also be seen as a cash substitute. A significant negative effect on the cash holding 
on the United Kingdom SMEs is documented by Belghitar and Khan (2013). Since debt 
can serve as an alternate source of liquidity for firms with access to borrowing capacities, 
an inverse relation between leverage and cash holdings is assumed, giving rise to the 
transactions motive.
A different channel through which debt is expected to manifest its influence on the level 
of cash is its maturity structure. Namely, when a company uses short-term financing, it is 
obligated to periodically renegotiate and renew its credit terms, thus facing refinancing 
risk (Ferreira & Vilela, 2004). Consequently, if the majority of debt in a firm is constituted 
of short-term borrowing facilities, it is expected that such firm will hold on to higher cash 
levels in order to secure a buffer against financial distress in case the loan is not prolonged 
(García-Teruel & Martínez-Solano, 2008). Considering the precautionary motive, we 
therefore expect shorter debt maturities to result in higher cash holdings and vice versa, 
i.e. longer maturities to result in lower cash levels.
Petersen and Rajan (1994) report that maintaining a close relationship with financial 
institutions brings benefits to the borrower as it increases the availability of credit. They 
also find a small piece of evidence that building relationships with lenders reduces the 
price of credit. This might come as a result of mitigating the informational opacity and 
agency costs of debt by disclosing internal information, which is accumulated by lenders 
when relationships last longer. These findings are further corroborated by Nakajima and 
Sasaki (2016), who argue that bank-dependent firms accumulate cash to foster better 
relationships with banks. Considering these effects, it is assumed that stronger firm-bank 
relationships lead to lower cash levels, because they offer a certain financial buffer to the 
firm. 
Net working capital can be considered as a cash substitute, in terms of bank lines of credit 
or certain non-cash liquid assets which can readily be converted to cash. In the case of 
small and medium-sized companies, this mostly applies to selling accounts receivable to a 
third party. As with all variables representing cash substitutes, a negative relation between 
net working capital and cash is expected, considering the transactions motive (Bigelli & 
Sánchez-Vidal, 2012).
Another factor that can affect the liquidity of the firm is the cash conversion cycle. This 
measure expresses the number of days it takes for a company to convert the resources 

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invested in inputs into cash. The longer the cash conversion cycle, the longer the liquid 
assets are tied up in operations. Taking into account the precautionary motive, we would 
expect that companies with longer cash conversion cycles, that is, with a weaker ability 
to generate cash from ongoing operations, will exhibit higher cash balances. Bigelli and 
Sánchez-Vidal (2012) show supporting evidence of this among Italian SMEs.
One of the novel determinants to be tested in this empirical analysis is the requirement 
for compulsory retirement benefit contributions. According to the Slovenian pension 
system, employers are obliged to pay certain prescribed amounts as mandatory benefit 
contributions to the Institute of Pension and Invalidity Insurance of Slovenia (Pension and 
Disability Insurance Act, 2012, Official Gazette of the RS, No. 96/2012 and the subsequent 
amendments; Social Security Contributions Act, 1996, Official Gazette of the RS, No. 
5/1996 and the subsequent amendments). The literature provides evidence that legally 
prescribed retirement contributions have negative impact on firm liquidity, especially 
in the case of financially constrained firms, a characteristic common to small private 
companies (Phan & Hedge, 2013; Rauh, 2006). Based on the above, the requirement 
for mandatory pension insurance is expected to demonstrate a negative impact on cash 
balances. On the other hand, the literature suggests that financially constrained firms pose 
positive cash flow sensitivities of cash due to the precautionary motive (Almeida et al., 
2004). Therefore, a positive relation between these obligations and cash levels is expected.
The next determinant introduced in the research is the exports volume. It has been 
shown that more liquid companies are more likely to export (Greenaway, Guariglia and 
Kneller, 2007). Looking at this relationship from the opposite side, the question arises 
whether a reciprocal effect of export activities on firm’s liquidity exists. If the company 
is capable of generating cash from ongoing operations, then the need for precautionary 
cash accumulation is lower and we can assume a negative relation between sales generated 
abroad and cash holdings. 
The research paper tests the relationship between cash levels and profitability, which has 
seldom been used in previous studies on determinants of cash holdings (e.g. Faulkender 
& Wang, 2006; Kling et al., 2014). There can be two channels through which a causal 
connection might be expected. The first causal relation is expected because profitability 
is considered a proxy for the operating performance of a company. In such case, it can be 
assumed that more profitable, that is more operationally efficient companies are more 
capable of internally generating cash. Therefore, it might be anticipated that higher 
profitability is associated with lower cash levels as the precautionary demand is lower. 
The second channel relates to cash being the least profitable liquid asset associated with 
opportunity costs, which might negatively influence a firm’s profitability, making the 
company opt for lower levels.
The study also investigates the impact of interest rates on the amount of cash maintained 
in a company. The sample is constructed in a way that the years before and during the 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 15
recent financial crisis are included with the purpose to study the influence of the recent 
low interest rate environment. Figure 1 shows the movement of the composite cost-of-
borrowing indicator which combines Monetary financial institutions’ (MFIs) interest rates 
on all loans to corporations (European Central Bank, 2013) in the Euro zone and Slovenia 
in the period preceding and during the economic downturn. It is evident from Figure 1 
that after the peak, reached just before the outburst of the financial crisis, the generally low 
level of interest rates persists throughout the sample period used in the research. 
Figure 1. Composite Cost of Borrowing Indicator in Eurozone and Slovenia over the sample 
period, 2006-2013
Source: European Central Bank Statistical Data Warehouse
In such an environment, where funds from external sources are more affordable and 
cash deposits bring even lower earnings, it would be expected that firms reduce their 
cash holdings. On the other hand, the overall economic uncertainty accompanied by the 
reluctance of banks to grant loans might have a prevailing impact and drive companies to 
hold higher levels of cash as a precaution. Campello, Graham and Harvey (2010) report 
that financially constrained firms in the United States, Europe, and Asia were forced to 
reduce their cash holdings by sizeable amounts during the crisis, while the unconstrained 
firms’ cash levels remained unaffected. Song and Lee (2012) identify a systematic change 
in the cash holding policies of East Asian firms, caused by the crisis of 1997-1998. They 
determine that the cause for the long-term increase in the demand for cash is a result 
of the precautionary motive in that these firms become more conservative in investing 
and more sensitive to cash flow risk. Sun and Wang (2015) find evidence of corporate 

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 16
precautionary savings during the financial crisis. They report a decrease in cash holdings 
among constrained and unconstrained firms in the first year of the crisis when the 
sources of external finance are tightened, and an increase in holdings afterwards when the 
precautionary demand prevails. It is therefore unclear at this point whether an opposite or 
a correlated relationship between interest rates and cash holdings is to be expected.
3 METHOD
3.1 Sample and variables definition
This study uses financial data on Slovenian small and medium-sized companies (SMEs) for 
the years 2006-2013 from the Agency of the Republic of Slovenia for Public Legal Records 
and Related Services (AJPES). AJPES maintains a central database, which publishes 
financial information on all business entities based on the territory of the Republic of 
Slovenia, derived from their annual reports and other corporate data, according to Article 
11 of the Companies Act (Official Gazette of the RS, No. 65/2009, and the subsequent 
amendments) and Article 71 of the Payment Transactions Act (Official Gazette of the RS, 
No. 110/2006, and the subsequent amendments).
The period between the years 2006 and 2013 is primarily chosen to gauge the effects 
of the financial crisis on the cash policies of the Slovenian SMEs. Even though data are 
available for the years before 2006, they are excluded from the analysis in order to achieve 
consistency and comparability among the financial statements across the stated years. 
Slovenia revised its accounting standards which are effective as of January 1st 2006.
3
What SMEs are is defined by the EU recommendation 2003/361. In accordance with the 
latter, an SME is a company that meets the following main criteria: a) has less than 250 
employees; b) realizes an annual turnover of less than or equal to EUR 50 million; and c) 
its balance sheet assets are less than or equal to EUR 43 million. The initial sample is the 
set of all the Slovenian SMEs provided by AJPES.
The initial sample was refined prior to analysing the collected data by applying several 
criteria. First, financial firms were excluded. Then, firm-year observations with missing 
values or errors in the accounting data were eliminated. The variables required to be 
positive are assets, sales and equity. To minimize the effect of outliers, 1% of the extreme 
values of the variables for cash, cash flow magnitude, leverage, liquidity, cash conversion 
cycle, profitability and growth were dropped. This left an unbalanced panel of 27,573 
unique firms with an average of 6.2 years per company, leading to an aggregate sample of 
170,220 firm-year observations. The sample is made up of 24% wholesale and retail trade 
companies, 22% companies involved in professional, scientific and technical activities, 17% 
3 See Valentinčič, Novak & Kosi (2017) for a detailed overview of the historic development of accounting 
standards in Slovenia, including an empirical investigation of the properties of accounting constructs.

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 17
manufacturing companies, 11% transporting companies, with the rest of the companies 
dispersed.
The dependent variable CASH, expressing the level of cash holdings, is measured as the 
ratio of cash to total assets minus cash, as cited in Opler et al. (1999). Following their logic, 
the natural logarithm of the book value of assets is used as a proxy for firm size (SIZE). 
The ability of the firm to generate cash or the cash flow magnitude (CF) is presented by 
the ratio of pretax profit plus depreciation to sales. The variable for growth (GROW) is 
approximated by the ratio of sales generated in the current year to sales from the previous 
year. Following García-Teruel & Martínez-Solano (2008), the variable for leverage (LEV) 
is calculated as total debt over equity.  The debt maturity structure (DEBTM) is defined as 
long-term debt over total debt. The financial statements available for this research provide 
information on short and long-term debt maintained with banks as two separate lines 
within the liabilities’ side of the balance sheet. Therefore, to approximate the relationship 
with financial institutions, the ratio of total bank debt to total debt (BANKR) is used in 
the research.
Following Bigelli and Sánchez-Vidal (2012), the variable for liquidity (LIQ) is calculated as 
net working capital less cash divided by net assets. The cash conversion cycle (CCC) is the 
sum of the average inventory conversion period and the receivables collection period less 
the average payment period for accounts payable.
The financial data available for this research provide information on annual pension 
insurance costs, however, these include payments for both mandatory and voluntary 
pension insurance, while our aim is to test the effect of the mandatory part of the costs, 
as suggested by Phan and Hedge (2013). Nevertheless, the total expenses for pension 
insurance are very indicative of the amounts paid as mandatory, thus the ratio of total 
pension insurance costs to sales is used to approximate the variable for compulsory 
retirement benefits (RET). To test the robustness of the results, an alternative variable is 
used and that is the number of employees, considering that the impact of compulsory 
pension insurance on cash holdings might be effectuated through the number of people 
working in a company. The variable for the number of employees (EMP) is derived from 
the average number of employees based on hours worked in the accounting period.
T o capture the relationship between export activities and cash levels and test the robustness 
of the regression results, two alternative variables are used: one variable expressing the 
magnitude of exports volume, calculated as revenues generated abroad over total sales 
(EXPO), and the other alternative being a dummy variable set to one for the firm-year 
observations where exports occur, and the value zero otherwise (EXPOD). Profitability is 
expressed as the profit margin (PROFM).
Interest revenues earned on bank deposits are not separately shown in the non-operating 
revenue section of the income statement, while interest expense on bank loans is a separate 

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 18
line. Therefore, the interest expense to debt ratio is applied as an estimate of the interest 
rate a company is paying on its outstanding debt (INT) as is stated in the existing literature 
(e.g. Karjalainen, 2011).
The model for investigating the relation between cash holdings and the explanatory 
variables is specified as follows:
CASH =α + β
1
SIZE
i
 + β
2
CF
i 
+ β
3
GROW
i 
+ β
4
LEV
i
 + β
5
DEBTM
i
 + β
6
BANKR
i
 + β
7
LIQ
i
 + 
β
8
CCC
i
 + β
9
RET
i
 + β
10
EXPO
i
 + β
11
PROF
i
 + β
12
INT
i
 + ε (1)
where i represents the firm and α the regression constant, while β
i
 (i = 1,...,12) stands for 
the regression coefficients and ε for the error term.
4 RESULTS
4.1 Summary statistics
Table 1 illustrates some of the main characteristics of the firms included in the sample. 
It reveals a quite dispersed ratio of cash to assets. While on average Slovenian SMEs 
hold 18% of cash relative to non-cash assets, the median firm holds approximately 5% 
in cash. This is much higher than the average 6% and 5% found in their Spanish and 
Portuguese counterparties respectively (García-Teruel & Martínez-Solano, 2008; Pastor & 
Gama, 2012). The sample is indeed made up of small entities considering that the mean 
and median firms have an asset base of approximately EUR 160,000 and they employ an 
average of about eight people. The firms are highly leveraged, with total debt 2.43 times 
their equity. Bank debt represents 16% of their total debt, which is mostly short-term 
considering that long-term debt represents only 18% of their total external financing. 
Table 1 also shows that the firms in the sample are not very export oriented, with their 
exports volume making up only 10% of total revenues. Finally, the figures clearly show 
weak operating efficiency and performance of Slovenian SMEs, turning only 1.3% of 
revenues into profit.

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 19
Table 1: Descriptive statistics of variables for the 2006-2013 sample (pooled)
Table 2 reports bivariate Pearson’s correlation coefficients of the variables. Overall, the 
correlations between the variable CASH and the explanatory variables show the expected 
relation directions, except for the variables for the cash conversion cycle, employees and 
profitability margin respectively. Furthermore, the correlation between CASH and EXPO 
is not statistically significant. The majority of bivariate correlations are not particularly 
high, except for the case of CF and PROFM with a correlation coefficient of 0.78.
 
Observations Mean
25th 
Percentile
Median
75th 
Percentile
Standard 
Deviation
CASH 170,220 0.1806 0.0081 0.0471 0.1777 0.3580
SIZE 170,220 11.9983 10.7324 11.9271 13.1902 1.7889
CF 170,220 0.0706 0.0195 0.0563 0.1180 0.1338
GROW 170,220 1.1448 0.8590 1.0164 1.2103 0.6881
LEV 170,220 2.4327 0.3867 1.1711 2.9761 5.9372
DEBTM 170,220 0.1820 0.0000 0.0000 0.3284 0.2615
BANKR 170,220 0.1582 0.0000 0.0000 0.2729 0.2384
LIQ 170,220 0.0346 -0.1364 0.0658 0.2925 0.4534
CCC 170,220 -47.3178 -79.0131 -4.8459 54.4380 301.5106
RET 170,220 0.0171 0.0039 0.0122 0.0241 0.0199
EMP 170,220 7.6665 1.0000 2.2000 6.2000 18.1670
EXPO 170,220 0.1007 0.0000 0.0000 0.0325 0.2378
PROFM 170,220 0.0127 0.0018 0.0156 0.0514 0.1228
INT 170,220 0.1132 0.0000 0.0000 0.0408 7.1642
Note: CASH is the ratio of cash to total assets minus cash. SIZE is the natural logarithm of total assets. CF is the 
ratio of pretax profit plus depreciation to sales. GROW is the ratio of sales in the current year to sales from the 
previous year. LEV is total debt over equity. DEBTM is the ratio of long-term debt over total debt. BANKR is 
the ratio of total bank debt to total debt. LIQ is net working capital less cash divided by net assets. CCC is the 
sum of the average inventory conversion period and the receivables collection period less the average payment 
period for accounts payable. RET is the ratio of total pension insurance costs to sales. EMP is the average 
number of employees based on hours worked. EXPO is the ratio of revenues generated abroad to total sales. 
PROFM is net income over sales. INT is interest expense to debt ratio.

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 20
Table 2: Correlation matrix
 CASH SIZE CF GROW LEV DEBTM BANKR LIQ CCC RET EMP EXPO PROFM
SIZE -0.240**
CF 0.010** 0.140**
GROW 0.036** -0.061** 0.071**
LEV -0.083** 0.143** 0.013** 0.052**
DEBTM -0.209** 0.325** 0.177** -0.021** 0.130**
BANKR -0.240** 0.384** 0.078** -0.048** 0.118** 0.463**
LIQ -0.160** 0.090** 0.099** -0.054** -0.051** 0.036** -0.015**
CCC -0.040** 0.074** -0.092** -0.037** -0.024** 0.028** 0.081** 0.316**
RET 0.026** -0.121** -0.158** -0.087** -0.061** -0.043** -0.037** -0.031** -0.184**
EMP -0.103** 0.501** -0.010** -0.027** 0.031** 0.080** 0.187** 0.025** 0.047** 0.052**
EXPO -0.003 0.212** -0.003 0.033** 0.031** 0.022** 0.045** 0.027** 0.047** -0.060** 0.195**
PROFM 0.078** 0.118** 0.780** 0.128** 0.020** 0.008** 0.026** 0.192** 0.007** -0.155** 0.026** 0.030**
INT -0.007** 0.007** 0.004 -0.002 0.007** 0.006* -0.006* 0.000 -0.001 -0.005 -0.001 -0.002 0.002
* Correlation is significant at the 5% level. **Correlation is significant at the 1% level. (two-tailed).
Note: CASH is the ratio of cash to total assets minus cash. SIZE is the natural logarithm of total assets. CF is the ratio of pretax profit plus depreciation to sales. 
GROW is the ratio of sales in the current year to sales from the previous year. DEBTM is the ratio of long-term debt over total debt. LEV is total debt over equity. 
BANKR is the ratio of total bank debt to total debt. LIQ is net working capital less cash divided by net assets. CCC is the sum of the average inventory conversion 
period and the receivables collection period less the average payment period for accounts payable. RET is the ratio of total pension insurance costs to sales. EMP 
is the average number of employees based on hours worked. EXPO is the ratio of revenues generated abroad to total sales. PROFM is net income over sales. INT 
is interest expense to debt ratio.

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 21
4.2 Univariate analysis
The size of a firm is an important factor that influences different aspects of the firm, 
from its profitability, riskiness, to access to external financing and the like, all of which 
are expected to have a certain level of impact on the level of cash within a firm. Based on 
this, a univariate analysis was performed to establish whether significant differences exist 
between smaller and larger SMEs. The sample is put together according to the variable 
SIZE and is ranked in size-deciles. Table 3 reports the results for the characteristics of the 
1
st
 and 10
th
 decile firms, based on which a significant difference between these firms can 
be established. 
Table 3: Characteristics of smaller versus larger SMEs
Comparing the 1
st
 and 10
th
 decile firms in terms of size, a significant difference between 
the two can be observed. As expected, the results show that smaller firms have significantly 
higher cash holdings. In addition, these firms pose a lower level of overall leverage and 
1st decile firms by size 10th decile firms by size
Mean 
difference
t-value
 Mean Median Mean Median
CASH 0.33941 0.13930 0.06425 0.01220 0.27516 66.9***
SIZE 9.01316 9.20019 15.25310  15.09172 -6.23994 -603.1***
CF 0.03025 0.03217 0.09148 0.06860 -0.06123 -39.37***
GROW 1.25795 1.02969 1.09911 1.02964 0.15884 19.31***
LEV 0.90324 0.41552 3.40767 1.63745 -2.50443 -39.26***
DEBTM 0.04009 0.00000 0.30076 0.25256 -0.26067 -108.30***
BANKR 0.02868 0.00000 0.32693 0.29828 -0.29825 -128.24***
LIQ -0.07101 0.08815 0.08190 0.06151 -0.15291 -24.76***
CCC -78.10286 -22.58997 -1.26703 26.64490 -76.83583 -22.46***
RET 0.02039 0.01096 0.01275 0.00954 0.00765 32.22***
EMP 0.93912 1.00000 37.28030 22.46500 -36.34118 -116.53***
EXPO 0.04509 0.00000 0.22438 0.04359 -0.17929 -64.64***
PROFM -0.02157 0.00744 0.02820 0.02109 -0.04977 -34.67***
INT 0.02116 0.00000 0.09058 0.03867 -0.06942 -3.82***
Note: CASH is the ratio of cash to total assets minus cash. SIZE is the natural logarithm of total assets. CF is 
the ratio of pretax profit plus depreciation to sales. GROW is the ratio of sales in the current year to sales from 
previous year. DEBTM is the ratio of long-term debt over total debt. LEV is total debt over equity. BANKR is 
the ratio of total bank debt to total debt. LIQ is net working capital less cash divided by net assets. CCC is the 
sum of the average inventory conversion period and the receivables collection period less the average payment 
period for accounts payable. RET is the ratio of total pension insurance costs to sales. EMP is the average 
number of employees based on hours worked. EXPO is the ratio of revenues generated abroad to total sales. 
EXPOD is a dummy variable set to one for firm-year observations where exports occur, and zero otherwise. 
PROFM is net income over sales. INT is interest expense to debt ratio.
*** Difference significant at 1%.

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 22
bank debt, which confirms that their higher riskiness limits the access to external sources. 
Furthermore, smaller firms are less liquid, as seen from the negative net working capital 
and cash conversion cycle respectively, which indicates that they do not pay their suppliers 
until payments from their customers are settled. Based on the results in Table 3, it can be 
concluded that despite the fact that smaller firms show higher growth, they are nevertheless 
less profitable and in the end generate lower cash flows.
4.3 Regression results
The nature of the data set, that is an unbalanced panel data, determined the application of 
the Fama-MacBeth method (Fama & MacBeth, 1973) in order to empirically estimate the 
model presented in section 3.1. The Fama-MacBeth regression approach is used to remove 
the problem of correlated residuals across time, an issue that might otherwise be present 
in panel data sets. If residuals are correlated, then the standard errors of the coefficient 
estimates can be biased, which in turn clouds the usefulness of the regression model. And 
this is the reason for the application of the Fama-MacBeth procedure. The latter consists 
of two steps, where in the first step, a cross-sectional regression is run for each time 
period. In the second step, the estimates for the parameters are obtained by averaging 
the coefficients of each cross-sectional regression. The time-series standard errors of the 
average coefficients are used to draw inferences. More specifically, the standard errors are 
calculated as the times-series standard deviation of the regression coefficients divided by 
the square root of the number of years (Fama & French, 2002).
In the continuation, in Table 4 the results of the Fama-MacBeth regressions are presented, 
using alternative proxies for some of the variables explained in the previous section with 
the purpose to evaluate the robustness of the regression results. The t-statistics are shown 
in brackets, while columns 1 and 2 show the results using the proxy for the mandatory 
retirement benefits expressed as the ratio of pension insurance costs to sales (RET) 
combined with the two alternatives for the export variable, namely exports as their ratio 
to sales (EXPO) and the dummy variable for the firm-year observations where exports 
occur (EXPOD). Columns 3 and 4 present the results using the variable for the mandatory 
retirement benefits approximated by the number of employees (EMP) with the same 
combination of the export variables. The results obtained with all four regression models 
are consistent. All variables are significant at the 1% level, except for the variable expressing 
the level of interest rates (INT) and the growth variable (GROW) which is statistically 
insignificant.

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 23
Table 4: Determinants of cash holdings in SMEs 
 Predicted sign 1 2 3 4
(Constant) 0.6963***
(30.41)
0.6916***
(27.99)
0.7265***
(28.74)
0.7274***
(27.04)
SIZE
-
-0.0379***
(-17.08)
-0.0375***
(-15.08)
-0.0404***
(-16.21)
-0.0405***
(-14.74)
CF
+/-
-0.2062***
(-16.38)
-0.2070***
(-17.30)
-0.2054***
(-17.10)
-0.2048***
(-17.79)
GROW
+
-0.0038
(-1.57)
-0.0028
(-1.24)
-0.0042
(-1.69)
-0.0032
(-1.39)
LEV
-
-0.0026***
(-18.12)
-0.0026***
(-17.84)
-0.0026***
(-18.50)
-0.0025***
(-18.02)
DEBTM
-
-0.0803***
(-24.58)
-0.0808***
(-23.28)
-0.0778***
(-22.26)
-0.0777***
(-21.00)
BANKR
-
-0.2169***
(-31.36)
-0.2183***
(-31.04)
-0.2169***
(-31.78)
-0.2184***
(-31.36)
LIQ
-
-0.1561***
(-8.76)
-0.1562***
(-8.79)
-0.1553***
(-8.65)
-0.1554***
(-8.67)
CCC
+
0.00004***
(6.21)
0.00004***
(6.31)
0.00004***
(5.52)
0.00004***
(5.64)
RET 
+
0.1893***
(3.90)
0.1895***
(4.05)
-
-
-
-
EMP
+
-
-
-
-
0.0004***
(7.42)
0.0005***
(10.16)
EXPO 
-
0.0665***
(16.25)
-
-
0.0639***
(15.15)
-
-
EXPOD
-
-
-
0.0149***
(5.58)
-
-
0.0144***
(5.22)
PROFM
-
0.6117***
(16.74)
0.6124***
(17.35)
0.6099***
(16.53)
0.6102***
(17.05)
INT 
+/-
-0.0012
(-2.17)
-0.0012
(-2.17)
-0.0012
(-2.17)
-0.0012
(-2.17)
R2 0.145 0.143 0.145 0.143
Observations 170,220 170,220 170,220 170,220
Note: CASH is the ratio of cash to total assets minus cash. SIZE is the natural logarithm of total assets. CF is the 
ratio of pretax profit plus depreciation to sales. GROW is the ratio of sales in the current year to sales from the 
previous year. DEBTM is the ratio of long-term debt over total debt. LEV is total debt over equity. BANKR is 
the ratio of total bank debt to total debt. LIQ is net working capital less cash divided by net assets. CCC is the 
sum of the average inventory conversion period and the receivables collection period less the average payment 
period for accounts payable. RET is the ratio of total pension insurance costs to sales. EMP is the average 
number of employees based on hours worked. EXPO is the ratio of revenues generated abroad to total sales. 
EXPOD is a dummy variable set to one for firm-year observations where exports occur, and zero otherwise. 
PROFM is net income over sales. INT is interest expense to debt ratio.
  ***Significant at 1%.

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 24
In Table 4, not only are the coefficients statistically significant, but what is more, in most 
cases they are also economically significant. One exception is the variable GROW, as due to 
its statistical and economic insignificance it does not allow drawing any conclusions about 
the relation between growth and cash holdings. It seems that growth opportunities do not 
play a significant role in deciding on the level of cash to be held in the Slovenian SMEs. 
To gauge the economic importance of the influence of the explanatory variables on the 
dependent variable, the principle of Kim et al. (1998) is followed. Namely, the economic 
impact is evident in the percentage change over the mean value of the dependent variable, 
which is the result of a one-standard deviation change in the explanatory variable, while 
all other values are equal.
The signs of the estimated coefficients are generally in favour of the expectations outlined 
in the previous section, thus supporting our hypothesis that the main motives behind the 
cash policies of Slovenian SMEs are the transactions and precautionary ones. The notable 
exceptions to our expectations are the coefficients of the variables representing exporting 
activities and profitability, which provide support for the speculative motive. With regards 
to the effect of exporting activities, the coefficients for these variables suggest exporting 
firms are more liquid and higher sales generated abroad lead to higher cash holdings. 
Viewed through the logic of the precautionary demand, if the company is capable of 
generating cash internally, then the need for precautionary balances is lower and should 
therefore lead to lower cash holdings, which is however contrary to our results. The fact 
that exporting firms maintain more cash might better be explained by the speculative 
motive. Namely, the presence of a firm on foreign markets may lead to more growth or 
investments possibilities. In order to be able to take advantage of positive investments, 
which are currently unkown, the companies instead decide to maintain higher cash levels 
in their accounts. The same implication is provided by the positive sign of the coefficient 
for profitability. Particularly, the results demonstrate that more profitable firms are more 
capable of generating funds, maintained in their accounts, internally. More profitable or 
more operationally efficient firms have higher probability to reap the benefits of positive 
investment opportunities, and this is the reason they hold on to their funds in order to be 
able to take on profitable projects once they arise. The variable PROFM is also the one with 
the most important economic significance, as an increase of one standard deviation leads 
to an average 41.5% increase in cash.
The estimated regression coefficient of the size variable implies that firm size does in fact 
matter in making a decision on the level of cash holdings. The coefficient for SIZE in this 
research is negative and statistically significant. A similar result is also found by Bigelli and 
Sánchez-Vidal for Italian SMEs (2012), and Pastor and Gama (2012) for Portuguese SMEs. 
The size of the coefficient suggests a substantial economic impact, as an increase of one 
standard deviation of SIZE produces a decrease in the cash held by between -37.1% and 
-40.1%. This finding indicates there are economies of scale in raising funds from external 
sources. Given that small firms suffer from severe exposure to informational asymmetries 
(Berger & Udell, 1998), they do not only face more severe borrowing constraints and higher 
costs of external financing (Kim et al., 1998), but are also more susceptible to financial 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 25
distress (Titman & Wessels, 1988). The listed characteristics can induce higher fixed costs 
of holding cash, where it is these relatively higher costs that prompt smaller firms to retain 
more cash in their accounts for transactions and precautionary reasons.
The negative sign of the CFLOW coefficients supports the idea that cash flow represents 
a ready source of liquidity, a finding contrary to the situation in Spanish (García-Teruel & 
Martínez-Solano, 2008) and Portuguese SMEs (Pastor & Gama, 2012), where firms show 
a preference for internally generated funds where information asymmetries exist. In our 
case, the ability to generate funds internally lowers the need for precautionary balances, 
meaning the firm’s cash holdings are used for current transactions.
All variables related to debt provide support for their expected influence on cash holdings. 
The negative sign of the variable LEV implies that operating and financial debt can be an 
alternative source of liquidity, albeit one with a relatively small economic impact, as the 
increase of one standard deviation decreases the level of cash by an average -8.4%. Given 
that leverage can be viewed as a cash substitute and as a proxy for the firm’s ability to 
generate external finance (Belghitar & Khan, 2013), we might conclude that these external 
resources are used for satisfying the transactions demand for liquid assets as well. The 
negative sign of DEBTM is in line with the hypothesis that when long-term debt prevails 
in the debt structure of a firm, the need for securing a financial buffer is less emphasized, 
thus firms tend to hold lower amounts of cash, a finding consistent with García-Teruel 
& Martínez-Solano (2008), and Pastor & Gama (2012). Looking at the other side of the 
coin, short-term debt financing means higher risk, such that the company which uses 
short-term finance has to renegotiate and renew its credit lines, which causes uncertainty 
and incurs costs. Therefore, a company chooses to retain more cash holdings in order 
to secure a certain buffer for precautionary reasons. Our findings are consistent with 
Kling et al. (2014), who observe a significant decline of short-term bank finance among 
United Kingdom listed companies, followed by an accumulation of cash. They explain 
this relationship by banks denying access to short-term finance, inducing companies to 
hold cash as an alternative funding source. Finally, the coefficient of the variable BANKR 
provides evidence that information asymmetries are reduced by maintaining a close 
relationship with banks. It thus increases the company’s ability to generate external funds 
and reduces the precautionary demand for cash. As expected, firms with a higher ratio of 
bank debt to total debt hold lower levels of cash, which is also the case with Portuguese and 
Spanish SMEs. Furthermore, the economic importance of this variable is rather high, as an 
increase in BANKR of one standard deviation brings about a reduction in cash holdings of 
an average -28.7%, ceteris paribus. 
Liquidity is one of the determinants with the highest economic significance resulting in a 
39% decrease in the level of cash for an increase of one standard deviation in the variable 
LIQ. This supports strongly the fact that other liquid assets may be used as a substitute for 
cash, consistent with the findings of García-Teruel & Martínez-Solano (2008), Bigelli & 
Sánchez-Vidal (2012,) and Pastor & Gama (2012). By having cash substitutes at disposal, 
the company reduces its precautionary demand for cash and maintains lower levels. 

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 26
The results obtained for the cash conversion cycle are very indicative of the precautionary 
behaviour of the SMEs in our sample, as we find that firms with longer cash conversion 
periods maintain higher cash holdings. From the positive effect of the length of the cash 
conversion cycle on cash levels, we might conclude that companies with weaker ability 
to generate cash from ongoing operations decide to keep higher cash balances, in order 
to hedge against uncertainty when cash turnover is low. Such results were obtained also 
for Italian SMEs (Bigelli & Sánchez-Vidal, 2012). The economic impact of this variable 
is relatively small, resulting in an average 7.2% decrease in cash levels for a one standard 
deviation increase in CCC. 
Turning to the proxies for the compulsory retirement benefit contributions (RET and 
EMP), a positive influence on cash holdings is observed, providing further support for the 
precautionary motive. Contrary to the previous findings that legally required retirement 
contributions negatively influence the liquidity of a firm, the results of this research suggest 
that Slovenian SMEs hold higher cash levels associated with higher pension costs. We can 
say that the firms in our sample act prudently and cautiously in that they accumulate cash 
in order to be able to meet future known obligations. Nevertheless, the economic impact 
of this effect is rather small. An increase of one standard deviation of the variables RET or 
EMP results in an increase in cash balances by 2.1% and 4.7% respectively.
Finally, limited evidence is found to support the theoretical expectation for the effect of 
the recently changed interest rate climate on the cash amounts held by companies. The 
coefficient’s sign is negative, suggesting that in the period of falling interest rates, i.e. more 
affordable external financing and lower earnings on deposits, firms are inclined to increase 
their cash holdings, presumably due to precautionary reasons. This is partially in line with 
the finding of Sun and Wang (2015) who observe a decline in cash holdings, but only in 
the first year of the crisis, after which cash holdings resumed growth. The relation between 
interest rates and cash holdings is, however, not statistically significant and even if it were, 
its economic impact would be insignificant.
5 ROBUSTNESS AND ADDITIONAL TESTS
In order to evaluate the robustness of our results, additional analyses are conducted. 
For the sake of brevity, the tabulated regression results of many of these analyses are not 
presented in this paper, but are instead available directly from the authors upon request. 
Our attention is first turned to the interest rate environment and its relation to cash 
holdings. As outlined in section 2.4, one of the objectives of this study is to analyse the 
impact of the changes in interest rates on the level of cash held. The effect is observed 
based on the average cross-sectional coefficients that span the period before, during and 
after the global financial crisis, which can average out their effect. Therefore, a subsample 
analysis is conducted by splitting the sample into different time periods, namely (i) pre-
crisis period between the years 2006 and 2008, (ii) crisis period between the years 2009 and 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 27
2012, and (iii) after-crisis period in the year 2013. Pooled cross-section regression analyses 
for each period are performed with the same variable combinations as the original model. 
Almost all regression coefficients have the same sign as the original regression model, 
with the exception of the coefficient for the variable GROW, which has a positive sign 
in three of the four regression models in the period before the crisis. Nevertheless, this 
variable is not statistically significant in this period, whereas it becomes significant at p = 
0.05 in the period 2009-2012. The most noteworthy difference is the fact that the interest 
rate variable is not statistically significant in the periods before and after the crisis, while 
in the crisis period it approaches significance with an even smaller economic impact than 
in the original model. More precisely, an increase of one standard deviation of INT causes 
a decrease in cash holding of only -1.24% on average. The number of employees does not 
seem to have any effect on the small and medium-sized enterprises (SMEs) cash levels 
before the crisis, as this variable is statistically insignificant in the period 2006-2008. This is 
also the case for the third regression model in 2013, whereas the latter becomes significant 
at p = 0.05 level in the fourth model in 2013. Finally, as regards the export dummy variable, 
it proves not to be statistically significant in the 2013 regression models.
Next, the difference in cash management policies between zero bank debt companies 
and indebted companies is analysed in order to assess the robustness of the conclusions 
based on leverage related items. For that purpose, we define two subsamples based on the 
ratio of bank debt to total debt (variable BANKR), for which some descriptive statistics 
are presented and separate pooled cross-section regression analyses performed. As can be 
seen from Table 5, these two groups of companies differ mostly with regard to the amount 
of cash they bear and the number of employees they have. The results show that companies 
with zero bank debt keep 28% of their assets in cash and employ 4 people on average, while 
indebted companies keep on average only 5% of their assets in cash and have around 12 
employees.

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 28
Table 5: Descriptive statistics of SMEs with zero and positive bank debt
Most of the coefficients from the subsample regression analyses have the same sign as 
in the initial model, except for the negative sign of the variable EMP in zero debt SMEs, 
and the positive sign of GROW together with the negative sign of EXPOD in indebted 
SMEs. What is interesting is that the variable GROW is statistically significant in both 
subsample analyses, however with a rather small economic impact and with an opposite 
Zero bank debt SMEs SMEs with bank debt
 
Mean Median
Standard 
Deviation
Mean Median
Std. 
Deviation
Mean 
difference
t-stat.
CASH 0.28249 0.11342 0.44260 0.05665 0.01459 0.13349 -0.22584 -147.97***
SIZE 11.28473 11.17303 1.62291 12.86594 12.80840 1.58645 1.58121 202.52***
CF 0.06548 0.05178 0.14495 0.07678 0.06067 0.11854 0.01130 17.70***
GROW 1.17635 1.01601 0.77031 1.10653 1.01683 0.57013 -0.06982 -21.46***
LEV 1.64323 0.67048 5.47078 3.39251 1.90638 6.32775 1.74928 60.30***
DEBTM 0.09416 0.00000 0.21999 0.28885 0.23474 0.26803 0.19469 161.50***
BANKR 0.00000 0.00000 0.00000 0.35051 0.31198 0.24193 0.35051 401.55***
LIQ 0.04852 0.11747 0.54151 0.01772 0.02886 0.31384 -0.03080 -14.65***
CCC -67.01304 -13.31384 324.66207 -23.37291 4.81291 268.77488 43.64013 30.34***
RET 0.01835 0.01269 0.02247 0.01555 0.01181 0.01604 -0.00280 -29.92***
EMP 4.19438 1.50000 11.74231 11.88776 4.39000 23.04748 7.69338 83.99***
EXPO 0.08876 0.00000 0.23393 0.11519 0.00000 0.24154 0.02643 22.78***
PROFM 0.01060 0.01617 0.13697 0.01517 0.01502 0.10304 0.00457 7.85***
INT 0.00603 0.00000 1.38635 0.24348 0.04615 10.55269 0.23744 6.19***
Observations 93,398 76,822
Note: Zero bank debt companies are defined as the companies with ratio of bank debt to total debt equal to zero. Positive bank debt 
companies are the SMEs with ratio of bank debt to total debt higher than zero. CASH is the ratio of cash to total assets minus cash. 
SIZE is the natural logarithm of total assets. CF is the ratio of pretax profit plus depreciation to sales. GROW is the ratio of sales in 
the current year to sales from the previous year. DEBTM is the ratio of long-term debt over total debt. LEV is total debt over equity. 
BANKR is the ratio of total bank debt to total debt. LIQ is net working capital less cash divided by net assets. CCC is the sum of the 
average inventory conversion period and the receivables collection period less the average payment period for accounts payable. 
RET is the ratio of total pension insurance costs to sales. EMP is the average number of employees based on hours worked. EXPO 
is the ratio of revenues generated abroad to total sales. EXPOD is a dummy variable set to one for firm-year observations where 
exports occur, and zero otherwise. PROFM is net income over sales. INT is interest expense to debt ratio.
*** Difference significant at 1%.

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 29
effect between the subsamples. Namely, it has a negative impact on cash holdings in 
zero debt SMEs, which is contrary to our expectations that future profitable investment 
opportunities urge companies to keep cash in their accounts to be able to fund them. 
Therefore, neither the precautionary nor the speculative motive are particularly strong in 
these companies. The situation is opposite with the SMEs that carry bank debt on their 
balance sheets, which show signs of precaution and possibly speculation by maintaining 
more cash in their accounts associated with sales growth. We also find that the variable 
INT is not statistically significant in any of the regression models. Therefore, we cannot 
make any inferences about the effect of the interest rate climate on cash holdings for 
both groups od SMEs. Furthermore, mandatory retirement benefit contributions do not 
seem to influence the level of cash in leveraged SMEs, as both RET and EMP variables are 
not statistically significant for this group of companies. On the other hand, the variable 
RET has a positive impact on the cash holdings in the SMEs with zero debt, while the 
higher number of employees is associated with lower cash holdings in these companies. 
This suggests that the number of employees might not be a good approximation of the 
requirements for mandatory retirement benefits. The negative impact of RET on cash 
holdings points to the precautionary motive, while the negative impact of EMP points 
to the transactions motive. Liquidity and profitability are again the determinants with 
the highest economic significance. Namely, an increase of one standard deviation in the 
variable LIQ or PROFM results in a decrease in the level of cash by 35% and an increase of 
36% for the zero bank debt SMEs respectively, and in a decrease of 46% and an increase of 
47% in the level of cash in the leveraged SMEs respectively.
Next, for the purpose of controlling micro companies, the sample is divided into two 
subsamples, one consisting of companies with zero or one employee, and the other one 
consisting of companies with more than one employee. The results are similar with 
the initial model, with minor exceptions only. The variables approximating mandatory 
retirement benefit contributions are statistically insignificant in three out of the four 
regression models for the micro companies. A possible explanation for this might be 
the fact that these are indeed micro companies and hence have very low expenditures 
related to mandatory benefit contributions. In the other group of companies, however, 
only the variable EMP is not statistically significant, which is another sign that it might 
not be a good approximation for mandatory retirement benefit contributions. In addition, 
exporting and non-exporting firms are analysed separately, nevertheless, a result similar to 
that of the Fama-MacBeth regressions is obtained, with just one exception and that is the 
negative sign of the variable for the number of employees in non-exporting firms.
Finally, industries are controlled for and a pooled cross-section regression analysis 
performed, using dummy variables at the two-digit industry classification code level. The 
Slovenian classification of economic activities is adjusted to the Statistical classification of 
economic activities in the European Community, abbreviated as NACE. These regressions 
lead to the same results as the Fama-MacBeth regressions, based on which it can be 
concluded that industry does not play an important role in the cash management policies 
of Slovenian SMEs.

ECONOMIC AND BUSINESS REVIEW | VOL. 22 | No. 1 | 2020 30
6 CONCLUSION
The purpose of this study is to examine the determinants of cash holdings in small and 
medium-sized companies. In order to do so, a large sample of Slovenian firms is used. The 
panel data consist of 170,220 firm-year observations corresponding to 27,573 firms in the 
period between 2006 and 2013. Slovenia is a particularly interesting choice of country 
in which to examine the characteristics of SMEs, since they constitute the majority of all 
non-financial business entities in the territory of the Republic of Slovenia and provide a 
significant economic value.
In the research, it is observed that the cash policies of Slovenian SMEs are generally 
driven by the transactions and precautionary motive respectively, however, we also find 
evidence for the speculative motive. Our results show that smaller firms opt for higher 
cash holdings out of precaution and due to transaction needs, as there are economies of 
scale in raising funds from external sources. The precautionary demand for cash prevails 
in firms with longer cash conversion cycles and higher retirement benefit obligations, 
where higher cash balances are recorded. Firms that are facing poor cash turnover and 
higher expenditures tend to hold on to higher cash balances in order to secure funds for 
unexpected needs. In addition, when short-term debt dominates the debt structure of a 
firm, it causes uncertainty arising from the ability to prolong the loans. Consequently, such 
firms need more financial buffer and for that reason maintain higher cash balances. 
On the other hand, firms that have cash substitutes at disposal, such as other liquid assets 
and debt, do tend to use them as such and thus keep lower cash balances in their accounts. 
Lower cash amounts are found in companies with higher cash flows as well. Keeping close 
relationship with banks reduces agency costs and information asymmetries among lenders 
and borrowers, which results in lower costs of external financing and better access to the 
latter. These companies, which are more capable of generating either internal or external 
funds, pose lower need for precautionary balances and use up their cash for transaction 
purposes. Little empirical support is found for the direct negative influence of the interest 
rate level on cash holdings, suggesting that the overall economic uncertainty accompanied 
with tightening credit conditions, might induce firms to increase their cash holdings, due 
to precautionary reasons.  
The finding that exporting and more profitable firms hold more cash than others provides 
support for the speculative motive. These firms have a higher probability of taking 
advantage of positive growth or investment projects, so they decide to hold on to their 
funds in order to be able to seize profitable opportunities when they arise.
This paper contributes to the existing literature on cash holdings decisions on several 
grounds. First, it expands the scarce literature on the determinants of cash holdings in 
small and medium-sized companies, a sector of great importance for the economy in 
general. Second, it focuses on a large sample of Slovenian SMEs, a country where no 

M. ANGELOVSKA, A. V ALENTINČIČ | DETERMINANTS OF CASH HOLDINGS ... 31
such research has been conducted so far. Third, it brings new evidence on the factors that 
influence the levels of cash by investigating so far untested determinants and by validating 
previous results. Lastly, it is the first paper that analyses the effect of the low interest rate 
environment on cash holdings of SMEs.
Even though this study makes a contribution towards better understanding of cash policies 
of SMEs, we acknowledge some limitations which we hope will serve as a prompt for future 
research. As the empirical investigation is based on a large sample of Slovenian SMEs, the 
study could only be generalized to firms similar to those included in our research. In order 
to be able to apply the findings of our research to SMEs in other countries, a comparison 
of their characteristics and cash policies would need to be conducted. Another possible 
direction for further research is that our empirical results show that SMEs hold large 
proportion of assets as cash. It would be interesting to examine the evolution of cash 
holdings in SMEs through time and the reasons thereof. Furthermore, it would be valuable 
to study the effect of cash holdings on SME performance, taking into account that SMEs 
are more financially constrained and have limited access to external finance.
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