tailieunhanh - Cash holdings and cash flow uncertainty

In light of increasing global financial market volatilities, firms are encountering a more uncertain cash flow than ever. To avoid missing investment opportunities, firms will hold cash as a precautionary measure. We investigate whether cash holdings in Taiwanese firms is indeed driven by the uncertainty of cash flow. Our empirical results confirm that uncertainty of cash flow is the most important factor that explains why firms hold cash. In addition, we found that the influence of cash flow uncertainty in cash holdings is asymmetric between better and poorer earnings sampled firms; that is, firms hold more (less) cash when their cash flows are more volatile at relatively better (poorer) earnings. Moreover, we verify that above results are not affected by a firm’s financial constraints or quality of corporate governance. Our contribution is to provide the first observation that cash-flow volatility plays the key role in explaining a firm’s cash holding. Our study is particularly meaningful for countries such as Taiwan that has smaller firms and highly uncertain business operations originating from increasingly global financial market turbulence and political disturbances. Our empirical results could serve as a useful reference for countries with shallow-plate markets, such as those in South East Asia. | Journal of Applied Finance Banking vol. 7 no. 6 2017 45-70 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2017 Cash Holdings and Cash Flow Uncertainty Lin Cho-Min1 Chien I-Hsin2 Chan Min-Lee3 and Chen Hui-Wen4 Abstract In light of increasing global financial market volatilities firms are encountering a more uncertain cash flow than ever. To avoid missing investment opportunities firms will hold cash as a precautionary measure. We investigate whether cash holdings in Taiwanese firms is indeed driven by the uncertainty of cash flow. Our empirical results confirm that uncertainty of cash flow is the most important factor that explains why firms hold cash. In addition we found that the influence of cash flow uncertainty in cash holdings is asymmetric between better and poorer earnings sampled firms that is firms hold more less cash when their cash flows are more volatile at relatively better poorer earnings. Moreover we verify that above results are not affected by a firm s financial constraints or quality of corporate governance. Our contribution is to provide the first observation that cash-flow volatility plays the key role in explaining a firm s cash holding. Our study is particularly meaningful for countries such as Taiwan that has smaller firms and highly uncertain business operations originating from increasingly global financial market turbulence and political disturbances. Our empirical results could serve as a useful reference for countries with shallow-plate markets such as those in South East Asia. JEL classification numbers E32 G32 Keywords Cash holdings Cash flow uncertainty Corporate governance 1 Introduction There is increasing evidence that in recent decades corporations have begun to hold more cash. Amess Banerji and Lampousis 2015 believe that increasing cash holdings have become a global phenomenon. From the 1990s to the 2000s cash holdings represented 10 of US gross domestic product GDP Dittmar and Mahrt-Smith 2007 and US firms cash .