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Table 4 presents the results of additional tests on the relationship between government deficits and corporate liquidity. The government deficit variable is interacted with other macroeconomic variables, such as inflation, RGDP growth rate, and interest rate.
The results on the relationship between cash and its benchmark firm-specific determinants correspond with those in Table 3 and previous studies. In addition, the results above are robust to various model specifications in Columns 1 to 6 where different combinations of macro variables are included. The coefficients on the government deficit and inflation variables are significantly negative (p < .01) in Column 1, similar with the results in Table 3. In addition, the corresponding interaction variable GD*I is negatively related to corporate liquidity (p <.05). This indicates that the negative relationship between corporate liquidity and inflation is reinforced when government deficits are higher. This further suggests that an increase in government deficits signals an increase in future inflation; real purchasing power of cash is reduced, and thus cash holdings are lowered. no checking account payday loans
Column 2 examines the interaction between GD and (RGDP). The coefficient on GD is significantly negative (p < .05), whereas RGDP is significantly positive (p < .01), similar with the results in Table 3. The coefficient on GDxRGDP is significantly negative (p < .01), indicating that the positive effect of RGDP growth on corporate liquidity is weakened, or even reversed, when government deficits are higher. This also suggests that an increase in government deficits signals economic slowdown in the future; firms reduce cash holdings because investment opportunities decrease under such circumstances.
Column 3 examines the interaction between GD and IR. The coefficient on GD is insignificant, whereas IR is significantly negative (p < .01), consistent with the results in Table 3. The coefficient on GD*IR is significantly negative (p < .1), indicating that the negative relationship between interest rate and corporate liquidity is reinforced when government deficits are higher. This suggests that an increase in government deficits signals an increase in interest rate; cash holdings decrease further in response to higher opportunity costs of holding cash. The result also implies that the government deficit-induced positive effect of interest rate on the cost of external financing is overwhelmed by the opportunity cost of holding cash; the net indirect impact of government deficit on corporate liquidity through the interest rate channel is negative. The results above are robust to different model specifications where CS and PC are added in Columns 4 to 6.