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Government deficit (GD) is defined as government expenditure minus government revenue, divided by nominal GDP. Inflation (I) is measured as percentage change in consumer price index with 2006 as the base year. Real GDP growth (RGDP), a proxy for economic growth, is measured as percentage change in RGDP with 2006 as the base year. Nominal short-term interest rate (IR), a proxy for opportunity cost of holding cash and external financing cost, is measured as the discount rate. The discount rate is used to proxy IR because it is what banks are to pay for to borrow funds from the Central Bank. Virtually all short-term interest rates change in response to changes in discount rate.
In addition, this study also considers two additional macroeconomic variables (i.e., credit spread and private credit) that might affect corporate liquidity. Credit spread (CS), a proxy for transaction cost and credit risk, is measured as the basic lending rate of the bank minus the discount rate, where the basic lending rate of the bank is measured based on the basic lending rates of the five largest banks in Taiwan. Based on the tradeoff theory, a positive relationship between credit spread and corporate liquidity is expected because firms should hold more cash when transaction cost is higher. Alternatively, when credit risk is higher and investors are less willing to lend to firms, firms should hold more cash because internal financing should be valued more (Almeida and Philippon 2007). Electronic Payday Loans Online
Private credit (PC), measured as the ratio of claims on the private sector by commercial banks and other financial institutions to nominal GDP, is a proxy for the depth of a country’s debt market (Dittmar et al. 2003; Kalcheva & Lins 2007). A positive relationship is expected because when borrowing from banks or other financial institutions is higher, private firms face higher risk of financial distress and thus they should hold more cash to prevent it from happening (Dittmar et al. 2003).
Table 2 presents the correlation matrix of variables and the variance inflation factors (VIF) for the independent variables included in econometric models in Tables 3 and 4. Corporate liquidity correlates with its benchmark determinants and macroeconomic variables, justifying the suitability of including them in econometric models. All values for VIF are less than two, so the concern about multicollinearity can be alleviated.
Given the data are cross-sectional and time-series in nature, a panel data model is more appropriate. The Hausman specification test is conducted, and the results favor the fixed-effects (FE) over random-effects panel models; thus, the FE panel model is used as the econometric model. In addition, cluster-robust standard errors are estimated to obtain /-test statistics and ^-values due to the intra-industry correlations embedded in the data structure. Year dummies are created to capture year-specific effects or business cycle effects.

Table 2 Correlation Matrix and Variance Inflation Factors

CH/NA MTB CF/NA NWC/NA LEV DIV Size CAPX/NA GD I RGDP IR CS PC VIF
CH/NA 1.000
MTB 0.268 1.0 00 1.33
CF/NA 0.247 0.369 1.0 00 1.39
NWC/NA 0.113 0.093 0.179 1.0 00 1.35
LEV -0.305 -0.179 -0.309 -0.463 1.0 00 1.41
DIV 0.041 0.023 0.158 0.110 -0.137 1.0 00 1.10
Size -0.141 -0.049 0.104 -0.178 0.120 0.104 1.0 00 1.11
CAPX/NA 0.052 0.169 0.267 -0.103 -0.052 0.111 0.046 1.0 00 1.17
GD -0.054 0.038 0.010 0.001 -0.019 0.107 0.058 0.109 1.0 00 1.29
I -0.003 0.124 0.014 0.006 -0.005 -0.106 0.009 -0.042 -0.204 1.0 00 1.20
RGDP -0.026 0.146 0.062 -0.008 0.028 0.001 0.000 0.026 -0.036 0.115 1.0 00 1.09
IR -0.061 0.314 0.077 -0.074 0.008 -0.027 0.103 0.197 0.159 0.222 0.057 1.0 00 1.32
CS -0.135 -0.004 -0.003 -0.033 0.059 -0.035 0.061 0.044 0.399 -0.228 0.034 0.035 1.0 00 1.41
PC 0.110 -0.128 -0.077 0.060 -0.106 -0.027 0.005 -0.105 -0.087 -0.106 -0.239 -0.252 -0.312 1.000 1.31

Table 3 Relation between government deficit and corporate liquidity

Dependent variable: ln(CH/NA) Independent variables 1 2 3 4 5 6 7
MTB 0.051*** a (7.83)b 0.050***(7.63) 0.052***(7.96) 0.050***(7.67) 0.052***(7.92) 0.052***(7.88) 0.052***(7.84)
CF/NA 1.596***(23.04) 1 592*** (22.99) 1.585***(22.89) 1.582***(22.84) 1 584*** (22.88) 1.589***(22.94) 1 572*** (22.69)
NWC/NA -0.676***(-18.93) -0.674***(-18.85) -0.667***(-18.67) -0.667***(-18.67) -0.665***(-18.62) -0.665***(-18.61) -0.664***(-18.58)
LEV 2 441*** (-61.14) -2.446***(-61.23) 2 445*** (-61.23) -2.447***(-61.26) 2 447*** (-61.28) -2.446***(-61.25) 2 449*** (-61.31)
DIV 0.002(0.24) 0.010(0.95) 0.003(0.33) 0.002(0.21) 0.001(0.10) -0.000(-0.02) -0.007(-0.63)
ln(Size) 0.011(1.16) 0.010 0.012(1.26) 0.012(1.27) 0.013 0.013(1.38) 0.012(1.35)
CAPX/NA 0.700***(7.13) 0.723***(7.35) 0.682***(6.92) 0.681***(6.90) 0.669***(6.78) 0.679***(6.89) 0.655***(6.62)
GD -0.316***(-3.61) -0.417***(-4.68) -0.398***(-4.45) -0.453***(-5.00) 0 494*** (-5.33) -0.345***(-3.80)
I -2.960***(-5.79) -3.027***(-5.91) -2.623***(-5.01) -2.687***(-5.17) 2 157*** (-3.77)
RGDP 0.544**(2.50) 0.548**(2.52) 0.704***(3.18) 0.881***(3.69)
IR -4.458***(-3.72)
CS 5 744***(3.88)
PC 0.153***(3.43)
Constant -1.346***(-6.77) -1.340***(-6.74) -1.334***(-6.71) -1.339***(-6.74) -0.831***(-3.44) -1.455***(-7.24) 1 644*** (-7.55)
N 55,702 55,702 55,702 55,702 55,702 55,702 55,702
n 1,841 1,841 1,841 1,841 1,841 1,841 1,841
R2 0.166 0.166 0.167 0.167 0.167 0.167 0.167

Table 4 Relation between government deficit and corporate liquidity: Interactions

Dependent variable: ln(CH/NA Independent variables )1 2 3 4 5 6
MTB 0.052***(7.97) 0.049***(7.41) 0.052***(7.96) 0.055***(8.34) 0.053***(8.01) 0.054***(8.27)
CF/NA 1 578*** (22.78) 1 595***(23.02) 1.600***(23.08) 1.580***(22.78) 1.583***(22.84) 1.587***(22.87)
NWC/NA -0.665***(-18.61) -0.672***(-18.81) -0.670***(-18.76) -0.662***(-18.51) -0.663***(-18.54) -0.666***(-18.64)
LEV -2.446***(-61.26) -2.446***(-61.22) 2 445*** (-61.21) -2.446***(-61.25) -2.448***(-61.30) 2 447*** (-61.25)
DIV 0.002(0.18) 0.008(0.78) 0.006(0.58) -0.004(-0.41) -0.010(-0.97) -0.003(-0.26)
ln(Size) 0.012(1.27) 0.011(1.17) 0.012(1.30) 0.013(1.39) 0.013(1.46) 0.013(1.40)
CAPX/NA 0.670***(6.79) 0 724*** (7.36) 0.710***(7.20) 0.655***(6.62) 0.662***(6.70) 0.672***(6.78)
GD -0.308***(-3.08) -0.197**(-2.05) -0.079(-0.37) -0.361***(-3.41) -0.304***(-2.96) 0.014(0.06)
I -2.250***(-3.81) -1.438**(-2.20)
RGDP 0.970***(3.34) 1 507*** (4.93)
IR -5.517***(-4.69) -7.748***(-2.70)
GD x I -24.681**(-2.41) -24.928**(-2.41)
GD x RGDP -14.087***(-2.57) -9.910*(-1.77)
GD x IR -11.206*(-1.69) -12.759*(-1.79)
CS 4.399***(3.01) 5 987*** (4.01) -3.716(-1.03)
PC 0.089**(2.16) 0.218***(5.45) 0.143***(3.86)
Constant -1.334***(-6.72) -1.353***(-6.81) -0.683***(-2.85) -1.597***(-7.41) 1 904*** (-8.85) -0.631(-1.40)
N 55,702 55,702 55,702 55,702 55,702 55,702
n 1,841 1,841 1,841 1,841 1,841 1,841
R2 0.167 0.167 0.167 0.167 0.167 0.167