“The impact of working capital management on cash holdings of large and small firms: evidence from Jordan”

Liquidity is a firm’s ability to pay its current obligations as they come due and thus remain in business in the short run, which reflects the ease with which assets can be converted to cash. The objective of working capital management (WCM) is to mini- mize the cost of maintaining liquidity while guarding against the risk of insolvency, working capital policy applies to short-term decisions, and capital structure finance applies to long-term decisions. Several studies have been conducted on the impact of WCM on cash holding levels. The impact of WCM on liquidity and cash holding levels is analyzed in this study. The study also makes a comparison between large- and small-scale firms. Panel data for 62 Jordanian industrial firms covering an eleven-year period (2006–2016) have been analyzed. The descriptive analysis indicates that large firms hold more cash than small firms, as well as more debt, cash flow and growth. The findings of the data set indicate that WCM, as a variable (working capital net of cash), is a strong predictor of firm cash holding levels. When a firm has several cash substitutes, it will maintain low cash levels. The separate analysis shows that there are significant differences between small- and large-scale firms for determinates related to cash holding levels. Firm size and cash flow ratios were strong predictors of cash hold- ing levels for both samples.


INTRODUCTION
Working capital is the difference between a current asset and a current liability of an organization. Thus, firms can enhance their liquidity position by virtue of increasing the amount of working capital.
Firms take into consideration the trade-off between risk and return, so WCM focuses on the quality of current asset items. The quality of current assets concerns the average time required for converting current assets into cash (Al-Debi'e, 2012). On the other hand, the quality of working capital takes into consideration whether a firm holds sufficient assets to cover its liabilities and to ensure that it has regular, sufficient, and consistent cash flow to fund its activities.
The way that working capital is managed has a significant impact on the cash holding levels of firms. Firms need to manage working capital as a substitute of cash holdings due to the following: if a firm's WCM is efficient, then the need to hold onto cash is reduced.

LITERATURE REVIEW
The study of Bates et al. (2009) discussed the reason why the average cash-to-asset ratio of industrial US firms increased by more than 50% between 1980 and 2006. The study found that the average firm could pay off debt obligations with cash holdings. Furthermore, it was found that cash-to-asset ratio increase was due to the fact that, when a firm's cash flow becomes risky, said firm will hold fewer receivables and inventories.
Abu Zayed (2011) found a significant negative relationship between firm market value (as measured by Tobin's q) and the components of cash conversion cycles. Furthermore, he found a positive relationship between the profitability of non-financial Jordanian firms, which was measured by virtue of the gross operating profit, and the components of the cash conversion cycle.
Kaddumi and Ramadan (2012) examined the impact of WCM on firm performance for a sample of 49 Jordanian industrial listed corporations for the years [2005][2006][2007][2008][2009]. The study used the ordinary least squares model and the fixed effects model. The results suggested the following: performance and WCM are positively correlated; Jordanian industrial firms followed a conservative investment policy and a less aggressive financing policy with respect to working capital; efficient management of working capital can add value to shareholder wealth.
Yeboah and Agyei (2012) studied the impact of WCM on liquidity and profitability for banks in Ghana, using panel data for the years 1999-2008. The study found that both 'profitability' and 'creditor-payment periods' have a significant and positive relationship with cash position, while cash conversion cycles, debtor collection periods, bank size and capital structure have a significant and negative relationship with the cash position of banks.
Shubita (2013) examined the relationship between profitability and WCM for industrial listed Jordanian companies for the years 2004-2011. Using regression models, the study found a significant negative relationship between profitability and working capital variables (number of days-receivable, number of days-in-inventory, and number of accounts-payable days).
Anjum and Malik (2013) examined the determinants of cash holdings on non-financial companies of Pakistan listed on the Karachi Stock Exchange between the years 2005 and 2011. The study found a significant relationship between cash holdings and selected variables, such as net working capital, debt level size and cash conversion cycle. Furthermore, the study did not find the same relationship with sales growth.
Michalski (2014) reported on Polish firms a suggested approach to predict the most accurate from firm maximization point of view cash management and current assets management policy and discussed the results from operating risk that is related to current assets and cash management policy.
The study of Upadhyay et al. (2015) used data from hospitals in the state of Washington from 2002 to 2011 in order to study the relationship between profitability and cash conversion cycle. A fixed effects analysis was used, and the study found that, in general, managers increased hospital profitability by decreasing the duration of the cash conversion cycle. Sharaf and Hadad (2015) analyzed the relationship between profitability and WCM components (using panel data analysis) for 43 industrial-listed Jordanian companies during the period 2000-2012. The results of regression analysis showed a significant negative relationship between profitability and cash conversion cycles. The results also showed that managers could create value for their shareholders by virtue of shortening both the inventory conversion period and the collection payment period, finding that profitability increases with size and sales growth and decreases with leverage.
Michalski (2016) discussed the risk sensitivity impact on enterprise decisions in area of net working capital investments and found on 4525 Romanian enterprises reported in Database Amadeus product of Bureau van Dijk that small net working capital leads some enterprises to negative changes in sales levels and to weaker profits.
Qurashi and Zahoor (2017) investigated working capital determinants for UK pharmaceutical industrial companies for the years 2009-2014, using the panel data method as an estimation tool. The multiple regression results showed a negative relationship between firm size and working capital and a positive relationship between growth and level of economic activity for UK pharmaceutical firms and working capital. Furthermore, insignificant results of working capital with profitability, operating cycle and leverage were observed.
The study of Jackpar et al. (2017) examined the impact of WCM on a firm's profitability, using a sample of 164 manufacturing companies listed in Malaysia over a period of five years from 2007 to 2011. Discriminatory panel regression and Pearson correlation were used to test the hypotheses. The study found that there is a significant positive relationship between firm's profitability and its average collection period, inventory conversion period and size. The findings showed a significant negative relationship between debt ratio and firm's profitability and that the cash conversion cycle had no impact on firm's profitability.
The study of Mahjabeen et al. (2018) aimed to analyze the WCM effect on corporate cash holdings, using a sample of 148 non-financial listed firms in Pakistan for the years 2004-2013. The study found that large and small companies need to remain high levels of cash substitutes. Yunos et al. (2018) examined the effect of WCM on profitability among 803 companies listed in Malaysia for the period 2010-2014 using panel data analysis. The study found that the number of 'sales inventory days' and number of 'account receivable days' determined the profitability of industrial listed Malaysian firms and that the current ratio, the debt-to-equity ratio, and firm size had a significant impact on firm's profitability.
Al-Naif and Al Shra'ah (2019) studied the relationship between the working capital components of Jordanian industrial companies (inventory conversion period, payment period, receivables collection period and cash conversion cycle) and profitability. This study used company size and debt ratio as control variables. The study sample consisted of nine extraction industry companies listed between the years 2000 and 2016. The study employed correlation and panel data methodology, finding a negative relationship between the debt ratio and profitability of a firm, a strong negative relationship between the components of WCM and profitability, and a positive relationship between profitability and company size.

LITERATURE REVIEW SUMMARY
Prior studies have discussed several factors that affect WCM and cash holding and, from these studies, it is obvious that there is a negative relationship between profit and liquidity. Therefore, the financial decisions of a firm are often are concerned with (and therefore informed by) having high levels of liquid assets (such as cash and other current assets) and investments in more profitable assets and projects.
The impact of WCM on cash holding levels has also been discussed in previous studies, the findings of which suggest that a significant relationship exists between working capital variables and cash holdings, which means that companies have to remain high levels of cash substitutes to avoid liquidity risks.
In addition, firm size is also considered as an important factor in previous studies: large companies generate more profit and have more cash substitutes than small companies. Table 1 summarizes the main results of previous studies.
To contribute to the already existing body of literature, this study will attempt to establish a relationship between cash-holding levels and working capital determinates of large and small scale Jordanian industrial companies. In addition, this study examines whether WCM has an important effect on cash holdings level in Jordanian industrial companies.  (2017) The negative relationship between firm size and working capital and a positive relationship between growth and level of economic activity Jackpar et al.
There is a significant positive relationship between a firm's profitability and its average collection period, inventory conversion period and size

Mahjabeen et al. (2018)
The study found that large and small companies need to remain high levels of cash substitutes The number of 'sales inventory days' and number of 'account receivable days' determined the profitability of industrial listed Malaysian firms Al-Naif and Al Shra'ah (2019) Negative relationship between the debt ratio and profitability of a firm

THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT
The motives behind cash holding can be described in terms of three motives: the transaction motive, the precautionary motive and the speculative motive.
The transaction motive refers to the cash required by a firm to meet day-to-day operations, such as wages, interests, inventory and dividends. The precautionary motive refers to the need to hold onto money in order to meet contingency situations, such as a change in demand or an increase in the price of raw materials. The speculative motive refers to the need to hold onto money in order to benefit from future opportunities, such as falling prices of raw materials or high return investment opportunities (Kieso et al., 2018).
Thus, cash is the most liquid and significant asset that a firm holds. It is significant as it is used to help with the expansion of business operations and is used to pay off a firm's obligations.
WCM concerns the optimal level, mix, and use of current assets, as well as the means used to acquire them, notably current liabilities to minimize the cost of maintaining liquidity (quick convertibility to cash) while guarding against the risk of insolvency.
Two main working capital policies exist: conservative and aggressive. A conservative working capital policy seeks to minimize liquidity risk for a firm by increasing working capital. The firm seeks to ensure that adequate cash, supplies and inventory are available, and payables are minimized. The firm keeps that additional working capital available and forgoes the potentially higher returns from holding long-term assets. This policy is reflected in high current ratios (current assetscurrent liabilities) and acid-test ratios (quick assets -current liabilities) (Gleim & Flesher, 2018).
Aggressive working capital policies, on the other hand, consist of decreasing liquidity levels and increasing short-term cash flow problems in order to increase profitability. This policy is reflected in low current ratios and acid test ratios (Zutter, 2018).
The optimal level of current assets will vary depending on the industry in which a firm operates. For example, a grocery store has inventory and cannot carry more than a few days of sales. In contrast, a uranium mine must have a high level of cash to meet ongoing expenses, because its sales may be irregular (Gleim & Flesher, 2018 The mechanisms of small firms are different than that of large firms due to the fact that they have to perform in different environments; thus, the factors that affect the WCM of small-scale firms are also different. Similarly, the working capital of small-scale firms might have a more obvious effect on cash holdings. In this manner, the factors that determine the cash holdings of small firms are different from that of large firms (Mahjabeen et al., 2018). In order to identify the possible differences in the determinants of small-and large-scale firms, the following can be hypothesized: H 02 : There are no significant differences between small-and large-scale firms with respect to the determinants of cash holding levels.

RESEARCH METHODOLOGY
Industrial shareholding companies listed in the Amman Stock Exchange that satisfy the following conditions will be included in the study sample: 1. Data required to calculate study variables should be between the years 2006 and 2016.
2. Companies that entered a consolidation process will not be considered, as this will have an effect on company figures such as earnings.
After including these two conditions, 62 companies will represent the study sample.
Panel-data methodology is used for the analysis because this method has many advantages over conventional data sets such as cross-sections or time series; for instance, it increases the degree of freedom by reducing the multicollinearity among predictors (Raheman et al., 2010). In addition, the working capital-related determinants of firm cash-holding levels were analyzed separately for large-and small-scale firms, which is to say the sample set was divided into two categories: large-scale firms and small-scale firms. Firms were scaled based on their total assets (Pinkowitz et al., 2013), wherein a firm was considered to be large (and was set to "1") if its assets were above the median value, and a firm was considered to be small (and was set to "0") if its assess were below the median value. For the purpose of analysis, 'cash holding level' was considered as a dependent variable while 'working capital net of cash' was taken as the working capital-related determinant of cash holding. Furthermore, cash conversion cycle, cash flow ratio, financial leverage, firm size, and sales growth were taken as control variables. Table  2 illustrates variable type, denomination and computation.   Table 3 shows the descriptive measures for the study variables after deleting outliers, which defined as the top and bottom 1% of the observations on each of the study variables. The mean value calculated for the cash ratio of Jordanian companies was 6%. The average value of large firms was 6.3% and 5.6% for small firms, which indicates that small firms hold less cash than large firms. These results were similar to the results of Mahjabeen et al. (2018) with respect to industrial firms; however, they differed from the results of Yeboah and Agyei (2012) with respect to banks with respect to banks, which suggested that the cash ratio was 24.84%. Indeed, Jordanian industrial firms require more than two years to convert cash. This long cash conversion cycle may lead to several liquidity problems.

DESCRIPTIVE ANALYSIS
The mean working capital value for the entire data set was 17.2%. For large-and small-scale firms, it was 14.2% and 20.1%, respectively, which suggests that small firms have more cash substitutes than large firms. Financial leverage percentage for the entire data set was 33.6%, which means that industrial firms rely more on equity. Large firms have greater cash ratios, as well as immaterial growth rate percentages.
In summary, the descriptive analysis indicates that large firms hold more cash than small firms, as well as more debt, cash flow and growth. Table 4 presents the correlation matrix for the study variables. The correlation between WCM and cash holding is negative but not statistically significant. The correlation between cash holding and cash conversion cycle is also negative, which is in line with expectations. Mahjabeen et al. (2018) had the same results.

BIVARIATE CORRELATION
As expected, financial leverage and cash holding are negatively and significantly related, which means that firms with a high level of debt don't need to hold cash. Firm size, firm growth and firm cash flow are positively related to cash holding levels, which is in line with expectations, while firm size correlation factor is insignificant. It is clear from this correlation matrix that the multicollinearity problem does not exist in the study variables. In addition, the variance inflation factor (VIF) was estimated for the two models, which is the ratio of actual disparity percentage and total disparity. The VIF for Model 1 is 1.8 and 1.6 for Model 2, both of which are smaller than that of Model 3. Accordingly, there is no multicollinearity problem in the regression models (Gujarati & Porter, 2009).  With respect to control variables, the firm leverage coefficient was significant with a negative relationship, which means that industrial firms use debt to reduce their cash position. This result is in agreement with the results of Yeboah and Agyei (2012) and Oppler et al. (1999). Furthermore, the results indicate that industrial firms with high growth rates tend to lower their cash levels. Therefore, industrial firms that have the greatest access to capital markets, such as firms with high growth percentages and high credit ratings, tend to hold lower cash-to-total-asset ratios.

REGRESSION ANALYSIS
The results confirm the fact that high-growth firms hold little cash because most of the available cash is invested in profitable long-term investments, instead of being stored in liquid or liquid equivalents.
The last control variable that has a significant relationship with cash level is the cash-flow ratio. Therefore, large cash-flow and high-profit firms have more cash holdings compared to firms with low profitability (Junli, 2011). Thus, profitable firms are likely to have more cash reserves than unprofitable firms. Model 2 was used to separately analyze the largeand small-scale samples. This was done in order to choose the appropriate measures from both fixed effect and random effect approaches. The Hausman (1978) test was used to demonstrate a significant p-value (0.000), so a fixed effect model was an appropriate model for this data set. The comparison of cash-holding determinants between large-and small-scale firms is presented in Table 6 and Table 7.    Financial leverage is insignificant for large companies and significant for small companies. Furthermore, firm size is significant in the smallscale firm subsample. This is because the cash-flow ratio has a positive relationship with cash holding level. Lastly, growth-of-sales results were different for subsamples: significant for large-scale firm and insignificant for small-scale firms.
The differences in the coefficients of the determinates of cash-holding levels between largeand small-scale firms -with the adj. R-squared between the two subsamples being 21.6% for small firms and 39% for large firms -lead us to reject the second null hypothesis. Accordingly, we can say that there are significant differences between small-and large-scale firms with respect to the determinants related to cash holding levels.

CONCLUSION
Several studies have been conducted on the impact of WCM on cash holding levels. This study contributes to existing literature by extending the area of inquiry to industrial firms in Jordan. The results of the study strongly demonstrate that WCM, financial leverage, firm growth, and profitability are key factors in explaining the level of cash held by industrial firms in Jordan. In addition, there are significant differences in the impact of these factors on small-and large-scale firms.
The descriptive analysis indicates different attributes of large-and small-scale firms. The following are found in small-scale firms: low cash holding levels, long cash conversion cycles, small financial leverage, and small growth and profitability. On the other hand, the following are found in large-scale firms: large financial leverage, large growth rates and profitability, lesser cash days of cash conversion cycle and low cash holding levels.
Regression was estimated using panel data, finding that WCM is a strong predictor of a firm's cash levels. A negative coefficient means that, when a firm has several cash substitutes, it will maintain low cash levels. Thereafter, the subsamples were separately analyzed. Firm size and cash-flow ratios were strong predictors of cash holding levels for both samples.
Overall, we can assert that large-and small-scale industrial Jordanian firms are different in terms of cash holding levels and WCM. Small-scale firms need to concentrate on financial leverage and cash flow.
Large-scale firms need to increase sales growth rates and, in order to maintain a suitable cash position, they need to gain profitable investment opportunities.