The sensitivity of cash flows to cash holdings: case studies at Vietnamese enterprises

Hung Dang Ngoc,Hung Nguyen Duy,Van Vu Thi Thuy

doi:10.21511/imfi.17(1).2020.23

Hung Dang Ngoc, Hung Nguyen Duy + Show 1 more

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https://doi.org/10.21511/imfi.17(1).2020.23

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Abstract

Cash management plays an important role in the business operations. However, holding too much cash results in unnecessary expenses such as opportunity costs, management costs, and representation costs due to negative cash holdings. This study examines the sensitivity of cash flows to cash holdings. The paper uses regression methods for table data, including FEM, REM, GLS, and GMM regression, with a research dataset including non-financial companies listed on Vietnam’s stock market in the period 2008–2018. Empirical results show that cash flows are positively associated with cash holdings levels. At the same time, research has shown an asymmetry in cash flows sensitivity to cash holdings. The study also classified the companies with limited and no financial restrictions. In the Vietnamese context, compared to unrestricted companies, financially restricted companies have a lower cash flows sensitivity. The research results are the basis for enterprises to manage cash better and increase business efficiency in the future.

Highlights

Cash management ensures that there is always an optimal amount of cash at a given time
This study examines the sensitivity of cash flows to cash holdings
Research has shown an asymmetry in cash flows sensitivity to cash holdings

Summary

Introduction

Cash management ensures that there is always an optimal amount of cash at a given time. Cash holdings include two types of costs: holding costs and opportunity costs. They exist simultaneously with three engines: trading engine, hedging engine, and speculative engine. Hedging engines show that companies use cash holdings for new investment opportunities or due debts when there is an adverse shock in the expected cash flows. Recent studies have often focused on clarifying how companies will react to a change in cash flows: increasing or cutting down cash holdings. The research shows that companies increase (decrease) the number of cash holdings when they have increased (decreased) cash flows. The authors found evidence that firms with limited access to outside funding held more cash when cash flows ran out, while companies without financial constraints did not.

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