Corporate Liquidity Management Research Articles

Corporate Liquidity Management and Financial Distress of Deposit Money Banks in Nigeria

Corporate Liquidity Management and Financial Distress of Deposit Money Banks in Nigeria

Social insurance premiums and corporate cash holdings: Evidence from social insurance law in China

Corporate liquidity management is closely related to firms’ labor costs. The relationship between cash holdings and labor costs proxied by social insurance premiums is underexplored in existing literature. We explore the enactment of the 2011 Social Insurance Law in China to investigate how social insurance premiums affect corporate cash holdings policy. We find that higher social insurance premiums lead to larger cash holdings for labor-intensive firms through the increased operating leverage. Our findings are robust to falsification analysis, placebo tests, and alternative proxies for key variables. The positive effect is stronger for firms with better legal environments, state-owned enterprises, and those with more migrant workers. In addition, the excess cash holdings by labor-intensive firms increase future operating performance and firm value. Overall, our findings are in line with the precautionary theory.

Corporate Liquidity Management in Emerging Economies under the Financial Constraints: Evidence from China

The main purpose of this article is to investigate the impact of the optimum level of cash holdings on corporate performance. Moreover, in this paper, the impact of financial constraints is tested as moderating factor between the relationship of cash holdings and corporate performance. The present study uses the system generalized method of moments (GMM) as the main estimation methodology. Using a sample of companies listed on stock exchanges of China, empirical pieces of evidence find that cash holdings-corporate performance relation is a nonlinear concave and depicts similar evidence for firms with financial constraints. The financially constrained firms maintain optimal cash holding at a higher level, which corresponds to debt rationing, difficulty to access financial markets, and the high cost of external finance. Moreover, propensity-score-matching depicts statistically significant differences in the level of cash holdings amid financially constrained and unconstrained firms. Finally, the difference-in-difference estimator shows that financial crisis affects less financially constrained firms due to low reliance on external financing.

Liquidity Provision and Co-insurance in Bank Syndicates

We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.

Country-level corporate governance and lines of credit

Agency problems related to country-level investor protection are important determinants of corporate liquidity management. This paper extends the work of Dittmar, Mahrt-Smith, and Servaes (2003) on country-level governance effects on corporate liquidity but with a focus on line of credit. Since both line of credit and cash constitute integral elements of a company's liquidity policy, a complete understanding of how country-level governance affects liquidity management requires that we also examine its impact on firm-level utilization of line of credit. Using a large sample of international firms from 44 countries, we find that in economies where investor protection is strong, the likelihood and the magnitude of line of credit obtained is higher. We also show that the substitutability of the line of credit and cash holding is stronger in these countries. Our study implies that minority owners in countries with strong investor protection can force corporate managers to disgorge cash and increase their reliance on monitored liquidity through line of credit.

Corporate Liquidity and Profitability Management: A Study on Textile Industry in Bangladesh

Purpose: This study aims to identify, whether corporate liquidity has an impact on profitability management concerning the textile sector in Bangladesh. Design: This is a causal study where the dependent variable is profitability, measured by Return on Assets (ROA) and Return on Equity (ROE). For the independent variables, the study adopts the traditional liquidity variables, namely Current Ratio (CR), Liquid Ratio (LR), and Total Cash Ratio (TCR). This study is based on secondary data collected from the annual reports of selected textile companies. Here, multiple regression analysis and descriptive statistics techniques have been used to actualize the research objectives. Findings: The study shows that there is statistically insignificant impact of liquidity on profitability management. It is unlikely that liquidity has influences on profitability management among the textile companies in Bangladesh. Originality/Value: This study has empirically validated the impacts of corporate liquidity on profitability management. Therefore, the research can be helpful for cash management and increasing profitability concerning the textile sector.

Credit risk spillovers and cash holdings

This paper examines how credit risk spillovers affect corporate financial flexibility. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers—credit risk contagion (CRC), where one firm's default increases the distress likelihood of another; and product market rivalry (PMR), where the same default strengthens the position of a competitor. We show that firms facing greater CRC have weaker subsequent operating performance and must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, and reducing investment and payout. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest that credit risk spillovers, especially CRC, play an important role in corporate liquidity management.

What determines the composition of a firm's cash reserves?

We investigate what determines variation in the composition of the financial assets that constitute corporate cash reserves and how this variation relates to other key liquidity management practices. The degree to which a firm invests its cash reserves in less liquid, longer-maturity financial assets that earn a higher yield is explained by financial constraints, the ability to accurately forecast short-term liquidity needs, and the firm's likelihood of defaulting on its debt. During years when a firm's cash reserves are required to fund increases in investment or operating expenses the firm transfers funds from less liquid to more liquid financial assets. A firm's decisions relating to the composition of its cash reserves interacts with other key liquidity management practices, such as relying on credit lines for liquidity, extending trade credit or using it as a source of financing, and holding large amounts of inventories. Our findings provide insights on an important component of corporate liquidity management decisions.

Economic Justification, Russia Business Regulation and Risk Management in Russian Companies: Limited Liability Company "SSK"

Abstract. The Russian government's plan to reduce spending, plan not to extend the stimulus package and have the possibility of raising taxes by 2021 are steps to be taken. One of the objectives of the policy of the Russian Federation is to provide the conditions for complete economic development for all levels of society. This study aims to explain how one company in the Russian Federation in the city of Kazan is related to increasing corporate liquidity and risk management. This study uses quantitative analysis methods with liquidity analysis approaches and corporate risk assessment. The results of this study explain that a company in the Russian Federation in the city of Kazan can develop measures to increase corporate liquidity and risk management. The International Monetary Fund also warned that the Russian government's conservative economic policies could impede an immediate recovery - especially in the context of the second wave of infections that pushed the country's healthcare system to its limits.

Data breaches and corporate liquidity management

AbstractThis paper investigates the effects of data breach disclosure laws and the subsequent disclosure of data breaches on the cash policies of corporations in the United States. Exploiting a series of natural experiments regarding staggered state‐level data breach disclosure laws, we find that the passage of mandatory disclosure laws leads to an increase in cash holdings. Our finding suggests that mandatory data breach disclosure laws increase the risks related to data breaches. Further, we find firms that suffer data breaches adjust their financial policies by holding more cash as well as decreasing external finance and investment.

Corporate cash holdings in emerging markets

This paper contributes to studies on corporate liquidity management. It explores the determinants of cash holdings of firms in emerging countries using panel data models. The results indicate that highly liquid firms in emerging countries show one or more of the following characteristics. They have larger size, lower capital expenditure, R&D, net working capital, leverage, and intangible assets. In addition, there is an inverse relationship between growth opportunities and cash holdings, suggesting the presence of a moral hazard problem. Moreover, using the system Generalized Method of Moments (GMM) estimator for dynamic panel data shows that the adjustment speed to the cash target level is not fast. The model also shows the impact of the dependent variable past realizations on corporate cash holdings.

Cash holdings: Do they boost or hurt firms’ performance? Evidence from listed non-financial firms in Saudi Arabia

Purpose The purpose of this paper is to study the relationship between corporate cash holdings and financial performance, both linearly and non-linearly, for listed non-financial firms in Saudi Arabia. Design/methodology/approach The data include all listed firms in Saudi Arabia’s primary stock market, excluding banks and insurance companies, over 2005–2016. The source for all data is the Osiris database. In evaluating the association between cash holdings and financial performance, static (i.e. pooled ordinary least squares) and dynamic (i.e. system generalized method of moments) specifications were implemented. Further, to confirm the non-linear linkage between cash reserves and financial performance, a U test was used. Findings The findings show that cash holdings play a significant role in firms’ performance; specifically, this relationship is non-linear, exhibiting an inverse U shape, driven by levels of cash reserves. This non-linear relationship verifies the tenets of the trade-off theory of optimum cash level based on the benefits and costs of holding cash. Research limitations/implications It is recommended that future studies investigate corporate liquidity and performance among Shariah-compliant firms and their conventional counterparts. Practical implications The findings of this study provide useful insights for managers and policymakers on efficient levels of corporate liquidity management. Social implications This paper provides further insights for investors on the role of corporate cash holding levels in firm performance. Originality/value To the best of the author’s knowledge, this paper is among the first to explore a non-linear relationship between cash holdings and firms’ performance using accounting measures.

Illiquidity as a signal

We propose a theory of corporate liquidity management in which signaling through illiquidity is cheaper than signaling through “skin in the game.” This causes ex post liquidation of worthy projects even when there are enough aggregate resources available for their continuation.We examine the policy remedies for this distortion and consider their consequences for the supply of liquidity, interest rate policy, and subsidies.

The role of accounting quality in corporate liquidity management

AbstractThis paper studies the role of accounting quality in accessing credit lines for liquidity purposes. While the literature suggests that firms should meet liquidity needs through credit lines and not cash holdings, some firms rely on cash instead because of limited access to credit markets. I find low accruals quality firms use less credit lines and hold more cash. This relationship is more pronounced when firms are financially distressed, when credit markets are tightening, and during the 2007–2008 financial crisis. The spread and the use of cash flow covenants in credit lines are two channels through which accruals quality affects liquidity choice.

The Liquidity Coverage Ratio and Corporate Liquidity Management

This note examines the changes in the liquidity management at banks and nonbank financial firms in the United States that occurred following the proposal of the liquidity coverage ratio (LCR) requirement in 2010 and its finalization in 2014.

Corporate Liquidity Management and its Impact on Profitability of Listed Firms in Ghana

Corporate Liquidity Management and its Impact on Profitability of Listed Firms in Ghana

Corruption and corporate cash holdings: international evidence

Although many prior studies document consistently negative effects of corruption on macroeconomic issues, the relationship between corruption and corporate financial decisions is debatable. In this paper, we investigate how corruption environment affects corporate cash holdings. With a sample of 199,333 observations across 46 countries, we find that corruption is positively associated with both cash holdings and the cash flow sensitivity of cash. Robustness tests with a reduced sample without US and Chinese firms, different measures of cash holdings and various regression approaches show that our research findings are stable. We also find that the effects of corruption are stronger if legal protection of shareholders is adequate. In addition, our additional analysis shows that corruption reduces value of cash. This paper shows that bribery motive of cash holdings is consistent around the world and firms tend to balance agency motive and bribery motive in their corporate liquidity management.

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

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.

Options Trading Activities and Corporate Cash Holdings

This paper examines the effects of options trading activities on corporate liquidity management. Based on a sample of 45,045 observations on U.S. non-financial firms from 1996 to 2016, we document a positive relationship between equity options trading intensity and corporate cash holdings. We address endogeneity concerns by using the instrumental variable approach, along with the CBOE's Penny Pilot Program as an exogenous shock. At the extensive margin, we find option listing to be associated with higher cash holdings, thus corroborating a causality interpretation of our baseline results. Studying the heterogeneous effects, we find the positive impact of options trading on cash reserves to be driven by firms where financial distress risk is high and debt-financed investments are constrained by liquidity issues. Moreover, options trading is positively associated with the cost of debt and marginal value of cash. Overall, these results suggest a precautionary saving motive due to active options markets that provide risk-shifting incentives to firms at the expense of outside creditors.

Credit Risk Spillovers and Financial Flexibility

This paper examines how credit risk spillovers affect corporate financial flexibility. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers—credit risk contagion (CRC), where one firm's default increases the distress likelihood of another; and product market rivalry (PMR), where the same default strengthens the position of a competitor. We show that firms facing greater CRC have weaker subsequent operating performance and must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, and reducing investment and payout. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest that credit risk spillovers, especially CRC, play an important role in corporate liquidity management.