Author(s): Majd Iskandrani, Amneh Hamad, Hadeel Yaseen, Tariq AlZoubi, Mohammad Almaharmeh
This study investigates the relationship between cash holdings and earnings quality of listed firms in Jordan. To attain the aim of the study, this research investigates the importance of earnings quality as a determinant of cash holdings by companies listed in Amman Stock Exchange (ASE). Companies in countries with lower investor protection and highly concentrated ownership hold less cash, supporting the role of information asymmetry (i.e., earning quality) in determining cash levels. The study conducts a pooled ordinary least square (OLS) data analysis on a sample of 39 industrial firms covering the period of 2010–2016, this study provides evidence that as earnings quality decreases, firms tend to hold more cash. Moreover, the research suggests that cash balances are positively influenced by the presence of greater information asymmetries arising from poor earnings quality but also from the existence of lower levels of regulatory oversight and the occurrence of losses, both of which reduce the importance of earnings quality as a determinant of cash levels. The study also implies that companies with higher levels of earnings opaqueness seem to benefit from having higher cash holdings so as to avoid dependence from costly external funding. Keeping in mind the importance of earning quality for the companies, it can be argued that the findings of this research have implications for the current and potential scholars and policymakers. Therefore, the outcome of this study demands that firms should pay more attention to disclosure policy and improve quality of the disclosed information as much as possible.