Financial Liberalization and Corporate Cash Policy

• In Event: Cash and Finance

Abstract

This paper examines the impact of financial liberalization on corporate cash holdings. According to the trade-off theory, firms have low incentive to build high level of cash when they can easily access to capital markets. As expected, our findings show that corporate cash holdings decrease significantly with financial liberalization. In particular, the effect of financial liberalization on cash holdings is stronger for financially constrained firms than for unconstrained firms, and is stronger for high-growth firms than for low-growth firms. In addition, we find that the effect of liberalization is more significant for countries with a higher degree of financial development, because the opening-up of capital markets tend to make financial markets unstable for countries with lower degree of financial development and thus dampens the effect of financial liberalization. Finally, financial liberalization not only decreases corporate cash holdings, but also slows the cash saving behavior, especially for that from external sources.

Author

• Yenn-Ru Chen, National Chengchi University