Cash management is often ignored in normal times. Usually, it is not until a crisis hits that the management of firms realizes the importance of holding cash. Since the US housing market crashed in 2007, a chain reaction has been occurring—from the insolvency of major financial institutions, job cuts of firms to worldwide economic meltdown. National governments and international financial institutions therefore successively adopted relevant bailout policies or rescue plans to restore the economy at the cost of rising government budget deficit.
The current global economy is characterized by economic slowdown, deflation, reduced interest rate, worsening government budget deficit, elevated credit risk, tighter credit, and other economic difficulties. Facing all these changes in macroeconomic conditions, firms should make the necessary adjustments to sustain their businesses. Cash position, one of the major financial decisions, should not be an exception. It is worth exploring how firms should change cash holdings in response to the changes in macroeconomic conditions. Against this backdrop, the current study therefore aims to examine how macroeconomic conditions influence corporate liquidity (cash holdings) in a global environment, an area which has never been explored in extant literature.
The primary contribution of this study to the existing international corporate liquidity literature is to show that macroeconomic conditions play a crucial role in determining corporate liquidity. The underlying reason is that firms operate in a large macroeconomic environment. Most previous studies use firm-specific financial variables to explain corporate liquidity. Surprisingly, the potential impact of macroeconomic conditions on corporate liquidity has received little attention in extant literature. We therefore attempt to fill this gap.
Using comprehensive data from 34 countries spanning the years from 1994 to 2005, our results reveal that macro variables like GDP growth, inflation, real short-term interest rate, government budget deficit, credit spread, private credit, and corporate tax rate indeed directly impact on corporate liquidity. Furthermore, we show that macro variables can affect the sensitivity of corporate liquidity to its benchmark firm-specific determinants. In general, our results establish that along with the conventional firm-specific variables, macroeconomic variables are important determinants of corporate liquidity and should not be ignored in future research.
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