Corporate cash holdings and financial crisis: new evidence from an emerging market

Abstract

A financial crisis is an exogenous shock to corporate liquidity management since it increases uncertainty and restricts firms’ access to external financing. While prior studies show that firms save more cash under precautionary motive during the crisis period, we argue that firms also consume cash for their investment projects and/or operating activities as a reaction to external financial constraint. In this paper, we argue that Vietnamese stock market, a typical emerging market, is a good laboratory to investigate corporate cash holdings under the global financial crisis since its under-developed financial system and poor investor protection make firms incur high costs of external financing. Using a sample of 5502 observations from 621 firms listed from 2007 to 2017, we find that cash-cash flow sensitivity is higher but corporate cash holdings are lower over the crisis period from 2008 to 2009. Furthermore, we also find that the effect of the financial crisis is stronger when firms are financially unconstrained. These research findings imply that firms save more cash and consume more cash due to higher uncertainty and external financial constraint caused by a financial crisis. When firms consume cash more than they save, their cash holdings are lower. Firms with low firm-specific financial constraint tend to consume more cash due to higher flexibility in their corporate liquidity management. This study helps managers understand how firms react to exogenous shock to corporate liquidity management.