The effect of institutional ownership and earnings quality on cash holdings level – An empirical study on companies listed in the Egyptian stock exchange

The research aims to analyze and test the relationship between institutional ownership and cash holdings, in addition to, the analysis and testing the relationship between earnings quality and cash holdings. Finally, the research aims to analyze and test that earnings quality mediates the relationship between institutional ownership and cash holdings. The research contains additional tests for the effect of the type of institutional investor (Active or Passive) on cash holdings & the effect of other earnings properties (Persistence & Volatility) on cash holdings. The research contains also a robustness (or sensitivity) tests for the effect of changing the measurement of institutional based on the general percentage of institutional ownership to the ownership of the largest institutional investor, plus testing the effect of changing the measurement of accruals quality to be measured based on Kothari model instead of modified Jones model. An empirical study was used to test the research hypotheses on a sample of 64 listed companies on the Egyptian stock market, during the period from 2012 to 2017. The total number of observations was 384 observations (firm – year). The empirical study was done by estimating multiple- regression models.
The research has found that, there is a significant negative relationship between institutional ownership and the level cash holdings and a significant negative relationship between earnings quality and the level cash holdings. Earnings quality mediates the relationship between institutional ownership and cash holdings. The additional tests have revealed that, the active institutional ownership has a significant negative effect on cash holdings, while the passive institutional ownership has a significant positive effect on cash holdings. Regarding properties of earnings, earnings persistence (volatility) has a significant negative (positive) effect on cash holdings and these earnings properties have mediated the relationship between institutional ownership and cash holdings. According to robustness (or sensitivity) tests, the ownership of the largest institutional investor has an insignificant relationship with cash holdings, there is a significant negative relationship between earnings quality (measured based on accruals quality using Kothari model instead of modified Jones model) and cash holdings and this earnings quality of Kothari model has mediated the relationshipbetween institutional ownership and cash holdings.