Determinants of liquid asset holdings of Indian corporations

Abstract

In this paper, we examined the determinants of cash and marketable securities for publicly traded non-financial Indian firms for the period 2002-2012. For the study, we selected a sample of 79 firms – these firms were the non-financial firms which are part of the BSE-100 index. The total observation set therefore consisted of 869 observations. However, the outliers were removed which compacted the final data size to 845 observations. Based on literature study, we studied the impact of following variables on cash holdings of a firm – firm size, growth options, leverage, payout to shareholders, firm cash flow, capital expenditure, financial distress cost, management control, liquid substitutes and expenditure on acquisitions/hiving. We performed a cross-sectional regression for the yearly data available for all the firms across all the years and obtained the coefficients for all the above stated independent variables. Thereafter, we used the Fama MacBeth model to estimate the effect of a unit exposure to each independent factor by regressing the cash holdings of firms against the factor exposures in each period and averaging the coefficients from this regression over time for each factor.

Our results indicate that firms with strong growth opportunities and greater firm cash flow hold more cash than other firms. Leverage, shareholder payout, capital expenditure and spending on acquisitions & hiving reduce a firm’s cash holdings. However coefficients for the following 4 factors out of the 10 used to determine cash holdings namely- real size, financial distress costs, agency costs and liquid asset substitutes, according to our results are opposite to that reported in literature. For real size, the coefficient is a very low positive number which we have rejected keeping in mind that asset prices have inflated over the 10 year period. The t-test for other 3 factors, however, showed that their coefficients are statistically insignificant. Thus, for these 4 factors, we reject the regression results and conform to their impact on cash holdings as per the existing literature.