Too Much or Too Little Cash? Optimal Cash Holdings and Firm Value in Family-Owned and Shariah-Compliant Firms

Abstract

This study examines whether deviations from optimal cash holdings affect firm value under different ownership and governance structures. Using panel data from 100 non-financial firms listed on the Pakistan Stock Exchange over the period 2009–2018, we employ a threshold model to capture the nonlinear association between corporate cash holdings and firm value. The results reveal a significant nonlinear relationship, confirming the existence of an optimal level of cash holdings that maximizes firm value. Deviations from this optimal level, either in the form of excess or insufficient cash are associated with a decline in firm value. Moreover, the negative value effects of such deviations are more pronounced in family-owned and Shariah-compliant firms, suggesting that concentrated ownership and religious governance frameworks intensify the costs of suboptimal cash policies. These findings offer important implications for corporate managers and policymakers, highlighting the need for carefully calibrated cash management strategies, particularly in firms characterized by family control and Shariah compliance. By providing evidence from a developing economy with relatively weak governance mechanisms, this study extends the cash holdings literature and uncovers previously overlooked moderating roles of family ownership and Shariah compliance in shaping the value consequences of corporate cash policies.