The Impact of Company's Cash Reserves on Financial Leverage Consumer Cyclicals and Non-Cyclicals Sector on the Indonesia Stock Exchange

Abstract

The decision to leverage companies as cash reserves to advance business processes is widely practiced by companies in developing countries. Leverage describes a company's ability to use funds that have a fixed burden to increase the level of income for the owner of the company. In addition, leverage is used to measure a company's ability to pay all its obligations, both short-term and long-term, if the company is dissolved or expanded. The purpose of this study is to see the effect of financial leverage on cash reserves. The independent variable in this study is financial leverage. The dependent variables are cash reserves, while the control variables consist of operating cash flow, liquidity, company capital expenditures, cash flow volatility, dividends, company size, company life, return on assets, and tobin's q. This study was conducted by collecting data from 253 Consumer Cyclicals and non-Cyclicals sector companies in   Indonesia within a span of 7 years (2015-2021) and using a panel data regression model in its testing. The results of the study presented that financial leverage, as measured by book leverage, negatively affects cash reserves. The lower the debt level, the higher the company's cash reserves, or vice versa. The novelty of this study is that it adds the Debt-to-equity ratio as one of the independent variables that are considered to be related to a company's cash reserves. The implication of the research that has been carried out is to provide direction for financial managers in monitoring risks in managing cash reserves and also assess the contribution of losses and the impact that will be obtained from each factor that supports financial leverage.