Hajar Falah Abstract Cash holdings strategy in companies is in fact a compromise between the costs and benefits of holding cash. In this study, by using data from 117 companies in Tehran Stock Exchange from 2011 to 2014, the relationship between the company's operating cycle and inflation rates with cash holdings strategy of the company was investigated. For this purpose, using panel models and OLS, the model coefficients were estimated. The results show that with the increase in inflation, from the loss of purchasing power of monetary assets perspective, the level of cash holdings of the companies was reduced. However, with reaching the inflation to the specified level, companies try to deal with bankruptcy by increasing levels of corporate cash holdings. At the micro level, results show that the level of cash holdings in long operating cycles is lower but when the cycle reaches to the certain amount, the companies raise the level of their cash to reduce the amount of the risk.

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Introduction Cash holdings by companies are one of the most important strategies that should be decided about it. In this case, Wang and et al (2014) suggest that cash holdings strategy of a company makes it's the future. In an imperfect market, the company for future transactions and reducing the risk tend to hold cash (Keynes 1936). But keeping too much cash can also increase the opportunity cost and holding less amount increases the deficit costs which hurts company’s trade. Keeping optimal amount of cash of course is a compromise between its advantages and its disadvantages (Opler and et al. 1999 ؛Harford, 1999). Increase in inflationary pressure is undoubtedly would have effect on the amount and cost of money and the advantages and disadvantages of reconciliation between cash holdings. In addition, the operating cycle of a company has effect on the level of cash holdings (Wang and et al, 2014) this study, taking into account the economic cycle at the macro level and the micro level specifications in the operating cycle, investigated the factors affecting cash holding by companies under inflationary conditions.Studies on the cash holdings of the Company, investigate the effect of the company's financial condition, governance systems, capital structure, cost of external financing on the level of their cash holdings. For example, in financial terms, it has been found that cash holdings in the company have strong relationship with the company's financial characteristics (Xin and Zhou, 2006). For example it has positive relationship with the enterprise leverage ,information asymmetry, age and size, investment opportunities and changes in cash flow (Falkndr ,2002) and a negative correlation with the company credit rating (Ozkan and Ozkanm ,2004؛ Wang ,2009 ). Bates and et al (2008) suggest that the funds with higher risk, lower inventory levels and increase in the spending on research and development increase the level of cash holdings in the United States. In the literature on systems of corporate governance and capital structure, Kusnadi (2003), conclude that the relationship between cash holdings and the number of board members is positive while the relationship between cash holdings and Non-management block-holder ownership is negative. Jean and Geo (2006) suggest that Chinese companies with better corporate governance mechanisms, have more reasonable amounts of cash and lack of cash could be seen less among them. Studies in the field of external financial environment are very important. For example, companies with high growth opportunities and the companies that think entering the market is more difficult and risky hold more cash. (Wang, 2009). The monopoly power of banks (Pynkvytz and Williamson, 2001), and past financial difficulties (Falkndr, 2002), have significant effects on cash holdings. Some studies have shown that companies that are active in different fields, in comparison with the companies that are present only in one industry hold less cash (Subramaniam and Tang, 2010). Recent studies on corporate cash holdings by big companies focus on the macro level or middle factors, including political, economic, legislative and industrial environment. In a comparison between countries, Pynkvytz and et al (2006) suggest that in countries with a lower level of investor's protection and a higher political risk willing to cash holding is more. Companies that are faced with financial constraints increase its cash during the economic crisis and increase its liquidity during the credit crunch promote (Custodio and et al, 2005). Also, due to the difference in tax rates between different countries, increasing tax rates and the costs associated with the multinational corporations changes the Company's liquidity ratio (Titman and et al. 2004). In Iran in recent years in the financial literature, attention on corporate cash holdings is increased. This interest stems from the fact that companies keep significant amounts of cash on their balance sheets. Tavakolnia and Tirgari (2014) in a study aimed at examining links between financial leverage and cash holdings curve examined the curved relationship between cash holdings and the company value. The sample consists of 105 firms listed in the Tehran Stock Exchange during 2008 to 2011, and to shape the financial leverage (U) the regression was used to test hypotheses. Their results represent the U relationship between cash holdings and the value of the company. Lashgari and et al (2014), suggest that cash is the critical resource for each enterprise and the balance between available cash and cash needs is the most important factor of economic health. In addition, the company with shortage of the cash has a lot of problems then they examined the relationship between shortage and surplus

Exploring Relationships between Company's Operating Cycle and Inflation Rates with Cash Holdings Strategy (A Case Study from Tehran Stock Exchange)

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of the cash and stock returns. The method used in this study, was panel and for sampling the screening methods (systematic elimination) was used. The results show that between surplus and shortage of the cash and stock returns in terms of inflation is no significant relationship. But between surplus and shortage of the cash and stock returns in terms of no considering the inflation, was a significant relationship. Cash is the vital source for each economic unit. A balance between available cash and cash needs is one of the most important factors of economic health and continuity of business unit's activities. On the other hand due to inflation status in Iran, more Iranian companies prefer to convert their cash into other assets. However, such a common phenomenon is a shield resistance against inflation but its secondary effect is that the company is failed in debt paying and the reputation of the organization was ruined. Experience has shown that most firms that are faced with bankruptcy and financial problems are suffered from poor working capital management and cash control (ahadi and et al. 2014).In other study, Ahadi and et al (2013) examined the internal and external company factors affecting cash holdings in listed companies in Tehran Stock Exchange during the years 2002 to 2011. Their research focused on property, cash from operations, company size, the volume of fixed assets and non-dividend profit as company internal factors and variables such as inflation, liquidity, the price of gold, the price of oil and the price of the currency as factors outside the company and examined their relationship with the level of cash holdings. Their results show that the variables of operating cash, company size, and the volume of fixed assets, non-dividend profit, inflation, liquidity and exchange rate have a significant correlation with cash holdings of the company. The results showed no significant relationship between ownership concentrations, gold and oil prices at the level of cash holding of the companies. Although many studies in the field of macro indicators affecting cash holdings have been carried out, but few of them have been investigated operating cycle at the studies on the macro level and the middle level. Although Zhou and Liu (2009) are examined the relationship between monetary strategy and cash holdings levels, but very few studies examined the effect of both macro and micro factors on cash holdings. In addition, the effect of inflation on cash holdings policies by companies can be very useful because usually the main cause of inflation is the government's tight monetary policies. From the cost and profit of cash holdings perspective, the inflation would be effective on the cost of capital. Inflation also stimulates the state control over macroeconomic indicators that directly affect the cost of capital. In this study, not only the effect of the operating characteristics of companies on the profit and cost of the cash holdings would be considered, but also changes in the external environment and how the compromise would be shaped are considered. In other words, how to determine the cash holdings policies in response to changes in the macroeconomic environment is studied. Figure 1 represents the Consumer Price Index in Iran between 1995 and 2014. The figure is drawn using data from the World Bank and 2010 was chosen as the base year, the index slope dramatically increased by increasing the time.

Figure 1. Consumer Price Index for Iran between 1995 and 2014

The slope prior to 2005, by a reasonable manner rising while after this year, it shows a sudden steep rise. This shows that inflationary pressures have increased steadily from 2005 to 2014. In this study, the effect of inflation on cash holdings and operating cycle at the macro and micro level in companies in Iran were investigated. Empirical evidence shows that the levels of cash holdings by the Company, with inflation increase were reduced. But when inflation reaches a certain level, the level of cash holdings in companies would be increased. There is U-shaped relationship between company cash holdings and operating cycle. The main concern of this study is as follows. The effect of inflation and operating cycle on the level of cash holdings from the macro perspective of the financial environment and micro perspective of the company characteristics are examined. Then, to improve corporate behaviour in the field of cash holding, a preliminary analysis of the factors influencing the relationship between inflation, operating cycle and cash holding would be presented. Theoretical Foundations and Hypotheses The impact of inflation on cash holdings In recent years, Iran's consumer price index has been rising with steep and steadily. The inflation conditions are effective on operating performance, management positions and the need to cash and the level of cash holdings should be changed actively or passively during this condition. The cash holdings level is the balance between its costs and benefits (Avplr et al. 1999, Peng and Zhu 2006).Since the cash, especially during the period of inflation, is not profitable assets, maintenance of cash can cause loss of purchasing power and increase in prices, interest rates and the cost of capital. Following this increase, to compensate the purchasing power lost, the interest rates rise and investors that want to enter the project require higher return rate than the interest rate and it forms the

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expected interest rates. To evaluate an investment project, the expected rate of return on capital investment usually is used to adjust the present value of future cash flows as the discount rate. The company invest some cash and the cash holding level is reduced (Ferreira, 2003). Furthermore When companies are cash equivalent assets Which can be converted to cash at a lower cost level it is reasonable through the sale of these assets increase their financial resources level.( Shleifer and Vishny,1984).Companies that hold greater amounts realizable assets show less willing to hold cash. Especially in the inflation time, these companies turn their assets into cash to raise its monetary level. So companies in comparison with cash holding tend to increase the assets with high liquidity. According to the mentioned issues, it seems that during the inflation time, when the cash holdings cost is high for the companies and the real income decreases, there is less demand for cash and, in fact, the companies tend to reduce their amount of cash. Finally, it can be said that with regard to the economic situation in Iran, inflationary pressures have allowed the company to reduce the cash value. Under such circumstances, there are more tendencies to establish long-term contracts for reducing the risk. In this situation, companies would face cash shortages for the allocation of resources, production and distribution. Based on the above mentioned issues, H1 is determined as follows. Hypothesis 1: by rising inflation the levels of cash holdings by the Company would be reduced. However, with inflation reaching a certain point, the company's cash increased by inflation. Operating cycle impact on cash holdings Operating cycle of a company depends on many factors, including industrial factors, business model and management efficiency. In general, the company's operating assets and work force must be in balance so that the company activities would be in balance and there wouldn’t be any problems. In other words, from the demand perspective, if the goods have a shorter operating cycle, the working capital, would cycle less time and the company should always inject new funding for the cycle of the buying, production and sale. In such conditions, the company should hold more cash to cover transaction ahead. In terms of supply, the shorter operating cycle means the shorter process of inventory, sales and cash flow recovery. This ultimately leads to an increase in the level of cash holdings in the company. For longer operating cycle the opposite analysis is true. By increasing the operating cycle, the circulation of capital will be difficult. Capital chain can’t meet the common requirements and demands of operational and investment opportunities would be lost. Avhlr and et al (1999), examined the cash flow risk impact and the cash holdings finance capacity and realize that companies that deal with higher risk and have less access to capital markets tend to hold more cash. If the company fails to spread liquidity risk well, it forced to have more cash for trading and speculation motivation. So, when the operating cycle reaches a certain point , Company increase cash to avoid the risk and cover the uncertainties in production and investment needs That it is the precautionary motive in keeping money in the cash holding theory. According to what was said earlier, there is U-shape relationship between operating cycle and cash holdings. At a specified interval, wider operating cycle means that the supply of money is constant and there is no need to keep large amounts of cash for transactions but extend operating cycle reduces the efficiency of working capital and provide more funds. This would reduce the level of funds to be kept. However, at a certain level by increasing the product cycle, especially when receivable accounts collection rate would be slows, the company will be dealing with a larger operating cycle and the risk of this issue requires companies to hold more cash to deal with future risks and uncertainties . According to these points, the second hypothesis is as follows. Hypothesis 2: by increasing the operating cycle, the cash holding is reduced. However, when operating cycle reaches a certain point, cash holdings increased by increasing the operating cycle. Data and Methodology The data used in this study relates to the companies listed in Tehran Stock Exchange from 2011 to 2014. Among these, the companies with financial jobs, companies with zero total assets and financial cycle and companies with deficit data have been eliminated. From the final list, the outliers (a high percentage and low ones) and irrational data also excluded. The final list includes 117 companies. Since data on the consumer price index for the entire country per year are available, the value of this indicator for the companies in any year is considered to be equal to the value of this indicator for the whole country in that year. According to the model Almeida et al (2004) and the situation in Iran and theories expressed in the previous section, we use the following model to test the hypothesis.

Operational cycle includes the inventory turnover and receivable accounts payback period. The variables used in the model are as follows.

264 H.Falah/ Teknologi Tanaman /Vol (12), Supp (2) 2015

The difference between the investment of cash and securities between year t and t-1 divided by

total assets

Consumer Price Index on the previous year (last year = 100)

Operating cycle divided by 1000 (the period of inventory turnover + receivable accounts repayment

period)

Inventory turnover period (360 multiplied by the average inventory divided by net operating costs)

divided by 1000

receivable accounts repayment period (360 multiplied by the average payable accounts divided by

operating revenues) divided by 1000

Cash flow divided by total assets

Logarithm of total assets

Market value to book value

Beta coefficient

The difference between the net working capital divided by total assets year t and t-1 in year t

The difference between current liabilities at year t and t-1 divided by total assets in year t

the industry dummy variable in the Tehran Stock Exchange

Statistical and numerical results Descriptive statistics In Table 1 descriptive statistics variables used in the study has been shown.

Table 1 summarizes the descriptive statistics characteristics of the variables used. Variable Sample size Mean Standard

deviation Minimum Maximum

897 0.0.8 0.0.0 0.8.0- 0.008

897 97.700 8.0.0 70.70. .90..97

897 0.0.. 0..00 0.090 0.0.0

897 0..90 0...0 0.0.0 0.0..

897 0..0 0...0 0.09 0.8..

897 0..00 0.90. 0..90- 0.780

897 ...007 ....8 9..00 .8.00.

897 ...00 0.00. 0...8 ..877

897 0...0 0..07 0.00. ...00

897 0.0.0- 0.9.8 .8..97- 0.000

897 0..08 0..0. .8.07.- ..880

As can be seen in Table 1 the means of the changes in the cash holdings to total assets in used data is equal to 17% While a standard deviation is 6.5%, minimum value is -0.712 and a maximum value is 0.527 . These values indicate a large gap between changes in cash holdings in various companies. The operating cycle data situation is the same. Inferential statistics In Table 2 the results of the regression are shown. In this table, the panel regression and ordinary least square regression analysis is represented. On both sides, the first column is the regression results without the effect of the production cycle, the second column is the variable regression results without the consumer price index and the last column is the results of the regression with all the variables, including second power variables of the production cycle and the consumer price index.

Table 2. The U-shaped relationship between changes in inflation rates and changes in cash holdings The results of the panel Results of ordinary least squares

**..00. **..887- **..8.0 **9.0.9 **0.7.. **9..00

***0..0.- ***0...8- ***0.780- ***0.770-

*0.00.8 **0.00.0 **0.0007 *0.000.

*0..07- 0.0900- *0.0970- *0.000.-

**0.099. **0.0.00 **0.000. *0.0007

*0..800 0..700 *0..... *0.0079 *0.0009 *0.00..

***0.007. ***0.0.8. **0.0909 **0.0..7 ***0.0.08 **0.0.0.

**0.0900 **0.0.07 **0.0799 *0.09.. *0.0909 *0.09.9

***0.00.9 ***0.00.8- ***0.0009 **0.0099- **0.00..- **0.00..-

**0.000. 0..700 **0..90. *0..790 *0..79. *0..790

***0.0... ***0.00.7 ***0.0077 ***0.097. 0.0987 **0.097.

0.9.. 0.990 0.9.. 0..90 0..79 0..97

*** Significant at 1% level ** Significant at 5% level * Significant at 10%

OLS results show that if the impact of the operating cycle on the model is not considered and this variable into the regression model ignored, CPI index would be negative in the model but the second power coefficient is positive. These results indicate a U-shaped relationship, and not a simple linear relationship between inflation and changes in cash holdings in the companies that are surveyed. The results are similar for the panel analysis. Even if the operating cycle and its second power added to the model, still there would be no change in the index of consumer coefficient and U-shaped relationship between inflation and changes in cash holdings. This indicates that by

H.Falah / Teknologi Tanaman /Vol (12), Supp (2) 2015 265

increasing the level of inflation, companies reduce their cash holdings level. Then, with reaching the inflation to the certain point, the government limits influences the size of the funds in the capital market and it causes the financial restrictions.in this way the cash demand rises and companies increase their level of cash holdings. These findings support the first hypothesis. OLS regression results show that regardless of the CPI and CPI2, Cycle coefficient is equal to -0.0385. The results of the panel are similar. Coefficients before and after the addition Cycle and Cycle2 don’t change much, especially in terms of signs, they are fixed. This also indicates that the operational cycle impact on cash holdings is not limited to a simple negative linear relationship. By increasing the operating cycle of the surveyed companies, their cash holdings would be reduced. But when the operating cycle reaches to a certain critical value, companies have to take precautions; in response to a gradual increase in operational risk they begin to increase their cash holdings that this supports the second hypothesis. Conclusion At the macro level, a continuous increase in the price level and inflation, are effective on the decisions related to the production of goods and cash holdings in companies. Using the consumer price index, the results of this study show that with the increase in inflation, from perspective of the loss of purchasing power of the monetary assets, the level of cash holdings by companies are reduced. However, with reaching the inflation to the specified level, companies try to deal with bankruptcy with increasing the levels of corporate cash holdings. 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Hajar Falah, MA student in accounting, department of accounting, college of accounting and management science, science and research branch, Islamic Azad University, Islamshahr, Iran. Email address: m.fallah1585@gmail.com