The sample consists of 1,841 nonfinancial firms from Taiwan. Following the majority of liquidity studies, the study excludes financial firms because they have different objectives. Nonfinancial firms that are government-related are also excluded because their liquidity management is likely to be affected by government regulations (Dittmar et al., 2003; Opler et al., 1999). Firm-specific quarterly financial data are gathered from the Taiwan Economic Journal (TEJ) database for the period 1981Q1-2009Q3 (115 quarters total). Macroeconomic data are gathered from AREMOS (Advanced Retrieval Econometric Modeling System) Economic Statistical Databanks. The raw data gathered are further manipulated to derive variables used in this study. Click Here
Table 1 gives the descriptive statistics of corporate liquidity and other control variables, including firm-specific and macroeconomic variables. Descriptive statistics are reported for the observations used in regression analysis. The sample comprises 55,702 firm-year observations. The mean and median values for corporate liquidity are 0.103 and 0.047, respectively, which are below those reported in other studies (Dittmar et al. 2003); unlike other liquidity studies, marketable securities are excluded from cash holdings in this study.
Corporate liquidity (cash holdings) is proxied by the cash ratio, which is defined as cash plus its equivalents (CH) divided by total assets (TA) net of cash and its equivalents, or net assets (NA). NA rather than TA is used to derive the cash ratio because it should be “assets in place” that are related to firms’ future profitability (Dittmar et al. 2003; Kalcheva & Lins 2007; Opler et al. 1999). The mean and median values of corporate liquidity for the entire sample are.103 and.047, respectively. Prior to estimation, given that firms with plenty of cash relative to total assets are likely to have higher cash ratios, the natural log of the cash ratio is computed for regression analysis to alleviate the concern about outliers (Foley et al. 2007).
The choice of the firm-specific determinants of cash holdings follows previous liquidity studies. The market-to-book ratio (MTB), a proxy for investment opportunities or information asymmetry, is defined as the book value of total assets less the book value of equity, plus the market value of equity, divided by book value of total assets. Firm’s profitability is proxied by the ratio of cash flow (CF) to NA, where CF is defined as earnings before interest and taxes, depreciation and amortisation, less interest, taxes, and common dividends. The additional liquidity asset of firms is proxied by the ratio of net working capital (NWC) to NA, where NWC is defined as total current assets less cash, less total current liabilities. NWC/NA is included because it has been found to be a substitute for cash holdings in previous studies. Leverage (LEV) is defined as total debt as a fraction of total assets. LEV is included because debt can reduce the agency problem within the firm. In addition, based on financing hierarchy theory, more cash means less need for debt financing (Opler et al. 1999). Dividend (DIV) is a dummy variable that takes on a value of one if a firm pays dividends, and zero otherwise. DIV is included because it can serve as a proxy for agency costs or financial constraints (Dittmar et al. 2003; Jensen 1986). Firm size (Size) is proxied by the book value of total assets in Taiwan dollar. Growth or potential investment opportunities are proxied by the ratio of capital expenditure (CAPX) to NA, where CAPX is defined as additions to fixed assets (Kacheva & Lins, 2007). The reasons for including these firm-specific variables are well discussed in extant literature and are beyond the scope of this study.
Table 1 Descriptive statistics for variables used in the study