Abstract
Using a detailed measure of financial integration and firm level panel data for 46 countries, we examine the relation between financial integration and corporate cash holdings. Our evidence suggests that financial integration reduces firms’ overall reliance on cash by mitigating the distortions in capital markets. Specifically, we find that both cash holdings and the marginal value of cash are lower in more financially integrated emerging markets. These effects are more pronounced for financially dependent firms. We also look at if financial integration increases corporations’ dependence on cash during high contagion risk periods due to elevated macroeconomic uncertainty. Our findings suggest that the benefits of financial integration in extenuating frictions in external markets and thus reducing corporations’ reliance on cash holdings overcomes its potential costs of increasing precautionary savings during high uncertainty periods.
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