Cash Holding in Manufacturing Companies: A Study of Indonesia

Objective – This study aims to examine the effect of company size, net working capital, and financial leverage on cash holding in manufacturing companies listed on the Indonesia Stock


Introduction
Manufacturing companies are no different from other types of companies such as service companies where cash is a form of asset that can be used immediately to meet the company's operational needs. There are three motives for a company to hold cash: a transaction motive, a precaution motive, and a speculation motive (Keynes, 1936). Cash in the company is called cash holding (Bates, Kahle, & Stulz, 2009). Cash holding is cash on hand or available for investment on physical assets and for distribution to investors (Gill & Charul, 2012).
Determining cash holdings at the optimal point is very essential because cash is the element of working capital most needed by the company to fulfill the company's operational activities. Both excess cash holdings and cash shortfall have consequences for the company and shareholders. Like a double-edged knife, excess cash holdings has disadvantages such as lower returns when compared to investing in real assets. On the other hand, cash shortfall can disrupt the operational company activities. One of the company's funding policies is how much cash policy the company must have that is sufficient for operational needs (transaction motive) as a source of investment funds to pursue future business opportunities (speculation motive) or for precautionary needs in case of external shocks.
In the Indonesian context, there is a phenomenon showing that several manufacturing companies listed on the Indonesia Stock Exchange (IDX) for the years 2012-2016, have cash (cash holding) that varies widely, ranging from 0.2% of total assets to 70.1% of total assets. In addition, the percentage of cash holding in each company per year during 2012-2016 varies. The cash holding phenomenon is an interesting issue to analyze further empirically in this study, and what factors can explain the cash holding phenomenon.
Company size is a description of the size of a company. The big companies are considered to be more capable of increasing company value because management has the flexibility to use company assets to increase productivity (Saputra & Fachrurrozie, 2015). Based on the trade off theory, there is a negative relationship between company size and cash holding. The bigger a company is, the easier it is for the company to get external financing, so that they are more likely to hold small amounts of cash or not create cash reserves. Research results by Ferreira & Vilela (2004) indicate that company size has a negative effect on cash holding. D'Mello, Krishnaswami, & Larkin (2005), Bates et al., (2009), Kim, Kim, & Woods (2011 and Gill & Charul (2012) also found the same case.
Furthermore, net working capital is obtained through reducing the company's current assets from the liabilities. If the results show that the net working capital is negative, it is estimated that the company is experiencing liquidity difficulties. In this condition, the company will keep more cash. Bates et al., (2009) stated that net working capital can be used as a substitute for company cash. This is due to the ease in changing its form into cash when the company needs it at any time. Thus, the increase in net working capital owned by the company results in a decrease in the level of cash holding. This has been proven by D'Mello et al.,(2005), Afza & Adnan (2007), Bates et al., (2009), Kim et al., (2011), Ogundipe et al., (2012 and Arfan et al., (2017) who found a negative relationship between net working capital and cash holding.
Another factor that influence cash holding is financial leverage. There are two opinions regarding the relationship between financial leverage and company cash holding. First, companies with high financial leverage have a high financial constraint tendency because they faced the high external funding costs (Guney, Ozkan, & Ozkan, 2007). Companies with high financial constraints have the tendency to hold higher cash. This raises an assumption that financial leverage as a proxy for financial constraint has a positive relationship with the company's cash holding. In one hand, companies that have a high financial constraint tend to go bankrupt. Of course, this condition is not expected by the company management. Therefore, companies that have high financial leverage have a motive to hold more cash to prevent bankruptcy (Al-Najjar, 2013;Al-Najjar & Belghitar, 2011;Kim et al., 2011).
Second, there is an opinion that financial leverage has a negative effect on cash holding. Agency theory states that there is a negative relationship between financial leverage and cash holding (Jensen & Meckling, 1976). Companies with high financial leverage have the ability to obtain external funding easily and at lower cost, thus enabling companies to reduce the amount of cash held (Ferreira & Vilela, 2004). The

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higher the level of financial leverage indicates the lower cash holdings. This is in accordance with the findings of Arfan et al., (2017), Dianah et al., (2014), Guizani (2017), Jinkar (2013), Nofryanti (2014), Ogundipe et al., (2012, Racic & Stanišic (2017 who found that financial always had a negative effect on cash holdings. This study refers to the previous one by Dianah et al., (2014) as the basis for selecting variables because it is necessary to focus on the information contained therein. The similarity between this study and the previous one is in the research analysis unit of manufacturing companies. The difference between them can be seen in the study period and research variables, and the analysis method. The previous research used the research period from 2010-2012, while this study used the 2012-2016 period. In previous research, the variable was growth opportunities, net working capital, financial leverage, while in this study, company size, net working capital and financial leverage were used as variables. The company size as a substitute variable for growth opportunities is used to prove that company size has an effect on cash holding. Furthermore, the previous studies used a cross-section data regression model, while this study used a panel data model that overcomes the weaknesses contained in cross data regression-section.
Based on this background, this study aims to examine the effect of company size, net working capital, and financial leverage on cash holding in manufacturing companies listed on the Indonesia Stock Exchange. The next sections of this paper follow this order: the second part is a theoretical framework and a hypothesis that provides a brief explanation of the concept of cash holding, the relationship between cash holding and its influencing factors and the hypotheses; the third part is a research method that explains the methods used in this research such as sampling, data collection methods, analysis methods, etc; the fourth part is the research result that explains the findings of this research; and finally the fifth part is the conclusions and limitations of the study and suggestions for further research.

Company Size and Cash Holding
Based on the trade-off theory, the relationship between company size and cash holding is negative. Company size has an inverse relationship with cash holding because large companies tend to invest in growth opportunities (growth opportunities) rather than hoard them (Harris & Raviv, 1990). The existence of diversification in the investment will have an impact on stable cash flow with the small possibility of financial distress (Titman & Wessels, 1988). Large companies have easy and cheap access to funding (Ferri & Jones, 1979). The opposite is certainly the case for small companies.
Bigelli & Sánchez-Vidal (2012) research results show that big companies take advantage of their scale of economy that allows them to secure the external finance relatively quickly and at lower cost. Moreover, they take advantage of their economic scale to reduce transaction costs, which are fixed costs incurred in external loan (Kim et al., 2011). That is why big companies do not need to accumulate large amounts of cash to avoid underinvestment as small companies do.
The results of research conducted by Ferreira & Vilela (2004) indicate that there is a negative relationship between company size and cash holding. Bigelli & Sánchez-Vidal (2012), Daher (2010), Ogundipe et al., (2012), Christian & Fauziah (2017) and Guizani (2017) found the same case of the negative influence of company size on cash holding. H1: Company size has a negative effect on cash holding Cash Holding, Manufacturing Company http: //www.jurnal.unsyiah.ac.id/JAROE Net Working Capital and Cash Holding According to the trade-off theory, there is an inverse relationship between net working capital and cash holding. This is because net working capital consists primarily of current assets in lieu of cash. According to Ogundipe et al., (2012), net working capital is used as a proxy for investment in current assets which can be used as a substitute for cash. When needed, net working capital can be liquidated quickly to cover the cash shortage that the company needs (Ferreira & Vilela, 2004).
Companies with large net working capital generally hold small amounts of cash. In other words, net working capital has a negative effect on cash holding (Afza & Adnan, 2007;Ogundipe et al., 2012;Opler et al., 1999). Net working capital is also sometimes needed to maintain the continuity of the company's activities without having to wait from the company's main income or revenue such as sales so that when the company has high net working capital, it will automatically reduce their cash balance (Opler et al., 1999). In general, companies with this condition will hold cash in low amounts (Afza & Adnan, 2007). This is consistent with the findings of Ferreira & Vilela (2004) (2017) and Arfan et al., (2017) showed the evidence that net working capital has a negative effect on cash holding. H2: Net working capital has a negative effect on cash holding

Financial Laverage and Cash Holding
Leverage has a relationship with the practice of earnings management, where investors will see the smallest company leverage ratio because the leverage ratio affects the impact of company risks that occur especially the risk of debt default (Perdana, 2019). Trade-off theory postulates that high financial leverage exposes companies to financial difficulties and bankruptcy. Companies that have high financial leverage will prevent this by holding more cash to prevent bankruptcy (Al-Najjar, 2013;Al-Najjar & Belghitar, 2011;Kim et al., 2011).
Managers who want to improve shareholders' welfare must design the company's cash holding at the right level between the profits and costs that must be borne by the company. If financial leverage is considered as a company's ability to issue debt, the effect of financial leverage on cash holding is negative (Ginglinger & Khaoula, 2007;Opler et al., 1999). Ferreira & Vilela (2004) stated that companies with a higher level of financial leverage have the ability to obtain external funding more easily and cheaply, thus it enables the company to reduce the amount of cash held. Furthermore, Marfuah & Zulhilmi (2014) stated that the higher the level of financial leverage, the lower the company's cash holdings. If the company can easily obtain funding sources from debts, the company can hold a low amount of cash. Research

Population and Sample
This study aims to examine the effect of the independent variables (company size, net working capital, and financial leverage) on the dependent variable (cash holding) through hypothesis testing. The population in this study were 144 manufacturing companies listed on the Indonesia Stock Exchange in the 2012-2016 period. The samples in this study was taken by purposive sampling method. The number of samples of manufacturing companies over the period of 2012 to 2016 from this study were 87 JAROE VOL. 3(3) companies with 5 years of observational data, thus, the total observations made of the study was 435. Samples were taken based on balanced panel data.

Operationalization of Variables
The operationalization matric of the research variables is shown in table 1.

Analysis Method
This study used combined data of cross-section and time series data known as panel data. Cross-section data is used because this study takes data from many companies consisting of 87 manufacturing companies as the research samples. Then, the time series data is used because it looked a time span of five years, from 2012-2016. The combination of these two data results in 435 research observations (87 companies for 5 years).
According to Basuki & Prawoto (2017:276) there are three models that can be used to perform panel data regression. The three models are Pooled OLS/common effect, fixed effect and random effect. Considering that panel data is a combination of cross-section data and time series data, the model can be written as follows:  Table 2 shows the two values of the cross-section probability F are 0.0000 and the Chi square cross-section probability is 0.0000, smaller than alpha 5%, so that the null hypothesis is rejected and the alternative hypothesis is not rejected. Based on these results, it can be stated that the best model to use is the fixed effect model.

Hausman Test
After doing the Chow test, the results show that the fixed effect model is the right model for panel data regression, the Hausman test is then performed. The Hausman test is used to determine whether a fixed effect model or random effect model is most appropriate. Based on table 3, the probability value of cross-section random is 0.0001 which is smaller than alpha 5%, which means that the null hypothesis is rejected and the alternative hypothesis is not rejected. Thus, based on the Hausman test, the best model to use in this study is the fixed effect model.

Hypothesis Testing Results
The results of the panel data regression model for the fixed effect model are presented in  Based on table 4, the panel data regression equation is obtained as follows: Y= 0,244739 + 0,001882X1 -0,152897X2 -0,379253X3 +eit

The Effect of Company Size on Cash Holding
Based on the results of the t test presented in table 4, company size has a significance level of 0.5798. This shows that the significance value (0.5798> 0.05). These results indicate that the value is greater than 0.05. This result shows an insignificant result. In other words, the company size has no effect on cash holding. Thus, the variation in company size is not able to explain variations in cash holding in manufacturing companies on the IDX for the 2012-2016 period. An insignificant result has also been found by (Christian & Fauziah, 2017;Hapsari, 2015;Jinkar, 2013;Ogundipe et al., 2012;Racic & Stanišic, 2017;Rahmawati, 2014).
The results of this study do not support the previous hypothesis and are also contrary to the trade-off theory which states that small companies have a higher level of cash holdings than big companies. The big companies are considered to have more diversification than small companies, so they are less susceptible to bankruptcy costs (Al-Najjar & Belghitar, 2011).

The Effect of Net Working Capital on Cash Holding
Based on the test results presented in Table 4, net working capital has a significance level of 0.0000. The significance value indicates (0.0000 <0.05). This explains that the significance value is smaller than 0.05. Thus it can be stated that net working capital has an effect on cash holding. The coefficient value of net working capital is -0.152897 (negative sign), which means that net working capital has a negative effect on cash holding. This negative effect means that the higher the net working capital of a company, the lower its cash holding is, and vice versa.
The results of this study support the previous proposed hypothesis and are in accordance with the trade-off theory, where there is an inverse relationship between net working capital and cash holding. This net working capital consists of current assets in lieu of cash. According to Ogundipe et al., (2012) net working capital is used as a proxy for investment in current assets which can be used as a substitute for cash. When needed, net working capital can be liquidated quickly to cover the cash shortage that the company needs (Ferreira & Vilela, 2004).

The Effect of Financial Leverage on Cash Holding
Based on the regression results presented in table 4, financial leverage (X3) has a significance level of 0.0000. This shows that the significance value is smaller (0.0000 <0.05). Thus, it can be concluded that financial leverage has an effect on cash holding. Financial leverage coefficient of -0.379253 (negative sign) indicates that financial leverage has a negative effect on cash holding. This negative influence can be interpreted that the higher the financial leverage of a company, the lower its cash holding is, and vice versa.
The results of this study are consistent with the previous hypothesis, where financial leverage has an effect on cash holding and the results show that financial leverage has a negative effect on cash holding. The results of this study are also consistent with the agency theory described in the previous section which points out that there is a negative relationship between financial leverage and cash holding.
In the results of their research, Ferreira & Vilela (2004) explained that companies with a low level of financial leverage can cause a lack of supervision from external parties. Therefore, it allows the greater managerial discretion to gain benefits for themselves when cash is at a higher level so the managers can use it.
Another reason for this is that high financial leverage reflects the ease which helps a company get external funding. This is the reason why companies with high financial leverage do not hold too much cluster because they are considered to provide lower returns when compared to investing in other assets. This is also in line with the pecking order theory. An additional reason is that companies with high debt ratios have low cash reserves because they also have to pay their debt installments plus the interest. A company with a high level of financial leverage will have a low cash holding rate. The results of this study are also consistent with the findings of Jinkar (2013), Dianah et al., (2014), Nofryanti (2014), Hapsari (2015), Guizani (2017) and (Arfan et al., 2017) who found a negative relationship between financial leverage and cash holding.

Implications of Research Results
The results of this study provide two implications on both theory and practice. On theory, the research results support the hypothesis based on existing theories such as the trade-off theory, agency theory, and pecking order theory. On practice, the implications of the results of this study include (1) it can be used as a reference for investors and creditors that to assess the cash holding of manufacturing companies in Indonesia it is important to pay attention to the level of net working capital and financial leverage, so that it can be used as basic guidance in investment decision making and corporate activity funding, (2) it can be useful for managers of manufacturing companies in Indonesia that in determining the optimal amount of cash holding, it is necessary to consider two factors that influence it; net working capital and financial leverage.

Conclusions
Based on the findings regarding the effect of company size, net working capital, and financial leverage on cash holding in manufacturing companies on the IDX for the 2012-2016 period, it can be concluded that company size has no effect on cash holding. This means that the size of the manufacturing companies on the IDX is not able to explain cash holding. This result is also inconsistent with the trade-off theory which states that small companies have a higher level of cash holdings than big companies because big companies are considered to have diversification so that they are less susceptible to bankruptcy costs. Then, net working capital has a negative effect against cash holding. This result is consistent with the trade-off theory that there is an inverse relationship between net working capital and cash holding. This is because net working capital consists of current assets in lieu of cash. Furthermore, financial leverage has a negative effect on cash holding. Low financial leverage leads to less supervision from external parties, thus allowing the greater managerial discretion when cash is at a higher level. In addition, high financial leverage reflects the ease that a company can get external funding and do not hold too many clusters because they are considered to provide lower returns when compared to investments in other assets. This research is limited by several circumstances. First, the selection of variables that are thought to affect cash holding consists of three variables. This allows for other factors that may have a greater influence on cash holding to be left out. Out of the three variables, there is one variable that is unable to explain variations in cash holding, the company size. Second, the unit of analysis in this study is only companies in the manufacturing sector. Therefore its results cannot be generalized to all sectors on JAROE VOL. 3(3) the IDX, especially for financial sector companies that have different capital structures.
Based on the results of this research, it is suggested that future research to add other variables that are expected to influence company policy in terms of cash holding such as growth opportunity, profitability, capital expenditure and so on. It is also suggested that the research population is not only limited to the manufacturing sector but also other sectors on the IDX, hence the research results can be generalized to all sectors on the IDX.