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Government Deficits and Corporate Liquidity: Empirical ResultsGovernment deficits and corporate liquidity
Table 3 shows the relationship of corporate cash holdings to government deficits and other macroeconomic variables. Column 1 presents the results of the benchmark model. Columns 2 to 7 include government deficit variable and other macroeconomic variables to examine how these additional macroeconomic variables influence corporate liquidity.
Results on how corporate liquidity is affected by the benchmark determinants are generally consistent with those from previous studies (Dittmar et al. 2003; Opler et al. 1999). For example, MTB shows a positive effect, indicating that management holds more cash in response to greater investment opportunities. CF has a positive effect on cash, indicating that firms, as a precaution, hold more cash when they are more profitable (Dittmar et al. 2003). Net working capital has a negative effect, confirming the notion that it is substitutable for cash. The coefficient of leverage is negative, suggesting that debt and cash are substitutes in terms of financing, concurring with the prediction of agency theory. Payment of dividends by firms and firm size do not show a significant impact on corporate liquidity. CAPX, a proxy for growth opportunities, has a positive effect, indicating that management holds more cash when growth opportunities are greater. Detailed discussion of the results on the impact of firm-specific variables on corporate liquidity is beyond the scope of the study. Electronic Payday Loans Online
As for macroeconomic variables, government deficit has a significant negative coefficient in Column 2 (p < .01), a robust result to different estimations where additional macroeconomic variables are included in Columns 3 to 7.2 This negative relationship supports hypothesis 4 that corporate liquidity should be lower when government deficits are higher. Hence, the government deficit-signaled negative effect of inflation and short-term interest rate appears to dominate the positive effect of economic growth and economic uncertainty, such that the net effect of government deficit on corporate
Inflation has a negative effect (p < .01 in Columns 3 to 7), indicating that corporate liquidity is lower when inflation is higher; that is, firms tend to transform non-interest bearing cash into interest-bearing marketable securities and short-term investments with higher real returns under such circumstances. This confirms the notion that demand for cash reduces when real purchasing power is weaker under such circumstances. Results support hypothesis 1.
RGDP has a significantly positive coefficient (p < .05 in Columns 4 and 5; p < .01 in Columns 6 and 7). Hence, with stronger economic growth, the propensity of firms to hold more cash to take advantage of greater investment opportunities outweighs the propensity to hold less cash due to the higher opportunity cost of holding cash; the net effect of economic growth on corporate liquidity is positive. Results support hypothesis 3.
In column 5, short-term interest rate has a significant negative coefficient (p < .01), supporting hypothesis 2 that cash holdings should be lower when the opportunity cost of holding cash becomes higher; that is, the positive impact of interest rate on corporate liquidity through the external financing channel is overwhelmed by the negative impact of interest rates on corporate liquidity through the opportunity cost channel; the net impact of interest rate on corporate liquidity is negative.
CS is positively related to corporate liquidity (p<.01 in column 6). This indicates that firms hold more cash when transaction costs or credit risks are higher, concurring with the prediction of tradeoff theory and financing hierarchy theory.
PC, a proxy for the depth of the debt market, has a positive effect, indicating that firms hold more cash to prevent financial distress when the capital market is more developed and so they can borrow more from the market.