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Government Deficits and Corporate Liquidity: ConclusionThe study examines the determination of corporate liquidity by focusing on how corporate liquidity is related to government deficits and other macroeconomic conditions. Results on firm-specific determinants of cash holdings generally concur with those of previous research. In addition, results on macroeconomic conditions indicate that corporate liquidity is negatively related to government deficit, inflation, and short-term interest rate. On the other hand, corporate liquidity is positively related to economic growth, credit spread, and private credit. Furthermore, this study also explores the interplay between government deficit and other macroeconomic conditions in corporate liquidity determination. The negative relationship between corporate liquidity and inflation and short-term interest rate is reinforced when government deficit is higher. On the other hand, the positive relationship between corporate liquidity and economic growth is weakened when government deficit is higher. This supports the hypothesis that changes in government deficits signal changes in future economic conditions. More specifically, government deficit signals an increase in inflation and interest rate but a decrease in economic growth in the future. Electronic Payday Loans Online
This study recognises limitations and suggests directions for future research. First, the study examines the contemporaneous impact of government deficits and other macroeconomic conditions on corporate liquidity. The primary objective is to infer the long-term relationship of corporate liquidity to government deficit as well as other macroeconomic conditions based on the 29-year sample. Future research can consider the lead-lag effect to provide a better insight into how today’s government deficits and other macroeconomic conditions affect future corporate liquidity in the future. Second, the signal effects of government deficits on other macroeconomic conditions are examined using a simple approach that considers interactions between government deficits and other macroeconomic conditions. Even though the results are intuitive and strongly validate the hypotheses proposed in this study, a more advanced methodology can be used to provide better insight into this research question. Third, the study results are obtained and interpreted based on the single-country sample. Future research can consider other countries for comparison to shed more light on the issue of how corporate liquidity is related to government deficit and other macroeconomic variables.
This study provides policy implications for Taiwan or other countries with similar level of economic development. First, macroeconomic conditions should be considered in future liquidity studies because country-level variables should have an overriding impact on firm-specific variables. Second, management of firms should consider the potential impact of government deficit and other macroeconomic conditions when maintaining optimal corporate liquidity. Firms, especially those that have been accumulating cash after the crisis, should reduce cash holdings when government deficits have been increasingly on the rise; an increase in government deficit signals an increase in inflation and interest rate, and a decrease in economic growth in the future. Accordingly, despite higher propensity to hoard cash due to economic uncertainty that comes with increasingly higher government deficits, firms are better off holding less cash so that they will be able to suffer less from reduced real purchasing power of cash, increased opportunity cost of cash, and reduced investment opportunities that accompany slower economic growth. Third, government authorities should also pay attention to the impact of running high budget deficits on firms. The prevailing corporate saving glut after the crisis reflects firms’ overall perception of higher economic uncertainty. Based on available literature, while increasing government spending can help recover the economy, the accompanying corporate cash hoarding may hamper economic growth. Hence, governments should try to spend less to ensure that economic recovery can be achieved, instead of causing firms to save more and invest less such that economic growth slows down, creating a vicious cycle.