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This paper investigates the impact of financial leverage on corporate cash holdings in the Middle East and North African (MENA) emerging markets.

The author applies the dynamic modeling approach to data from nonfinancial firms listed in 10 MENA countries between 2010 and 2019. The empirical model avoids the shortcomings of the prior literature by including indicators of the dynamics of the financial leverage to account for its persistence in the corporate cash holdings reserves.

This research reports a significant negative relationship between corporate cash holdings and financial leverage. The results support the pecking order model, suggesting that leverage can be regarded as a substitute for holding a larger amount of cash and marketable securities. The author argues that the negative relationship between financial leverage and corporate cash holdings reinforces the precautionary motive to have internal cash reserves rather than external debt to support capital and investment activities by firms in the MENA emerging markets.

The results of this research provide important insights into cash and capital structure management for nonfinancial listed firms in the MENA emerging markets. Specifically, the paper will help managers to understand the dynamic financial leverage determinants of holding cash in corporations in the MENA emerging markets and encourage policymakers to financially determine the corporate capital structure and cash holdings based on cost and benefits. Managing the firm's capital structure and cash holdings based on trade-offs between costs and benefits would enhance operating cash flow which may play an important role in creating value for shareholders.

Prior studies have commonly been concerned with the determinants of corporate cash holdings, but few have investigated the dynamic financial leverage determinants of corporate cash holdings. This paper draws attention to this issue within the context of MENA emerging markets. To the authors' best knowledge, this is the first study that explores the relationship between cash holdings and financial leverage in MENA emerging markets.

This paper aims to document the impact of corporate cash holdings on firm performance in Middle East and North African (MENA) emerging markets. The authors also examine how the quality of national governance shapes the interaction between corporate cash holdings and firm performance.

The authors employ data from non-financial firms listed on the stock markets of twelve MENA countries between 2004 and 2018. The empirical model avoids the shortcomings of the prior literature by applying a dynamic framework to the relationship between cash holdings and firm performance.

This research reports a significant positive relationship between corporate cash holdings and firm performance. The results appear to be more pronounced in countries with strong national governance and more developed institutional settings. The findings demonstrate that most benefits of corporate cash holdings can be achieved under strong institutional settings. The authors argue that the positive impact that national governance has on individual firms by reinforcing investors' protection and lowering agency problems increases the added value of cash holdings.

The findings should encourage local authorities and policymakers to reinforce the law and instigate new regulations to strengthen the quality of national governance and restore the integrity of local markets.

Prior studies have largely been silent on how national governance can shape the relationship between corporate cash holdings and firm performance. This paper draws attention to this issue within the context of MENA emerging markets. To the authors' best knowledge, this is the first study that explores the interaction between cash holdings, firm performance and national governance in MENA emerging markets.

This paper aims to discover the underlying mechanisms by which corporate financial policies, cash holdings, capital structure and dividend payouts, transmit their effects on firm value in the “Middle East and North Africa” (MENA) emerging markets.

The authors employ a novel integration of path modelling with parallel multiple mediation analysis to empirically test the hypothesised indirect effects through the mechanisms represented by the value of financial flexibility (VOFF) and agency costs.

The authors do not find any evidence of the association between cash holdings, dividend payouts, and firm value when the mechanisms through the VOFF and agency costs are considered. While these two forces, i.e. the VOFF and agency costs, have balanced mediation effects on the relationship between cash holdings and firm value, they represent equivalent and complementary mechanisms by which dividend payouts transmit their positive impact on firm value. Moreover, we document a significant negative partial mediation effect of agency costs on the relationship between leverage and firm value; however, we do not find any evidence supporting the mediation effect of the VOFF on such a relationship.

This paper sheds new light on the forces that govern the nature of the relationships between corporate financial policies and firm value.