Liquidity Management of Non-Financial Firms : Cash Holdings and Lines of Credit

With a novel dataset of over two thousand firms covering 2006-2012 period, this study examines liquidity management of non-financial firms in Turkey. We find the following results: First, cash holdings and lines of credits are complementary if the profits are low or cash holdings are small, while they become substitutes if profits are high or cash holdings are large. Second, firms with more available funds (cash plus unused credit lines) invest more than the others; moreover, given the same amount of available funds, those firms which hold more cash make more investment. Third, firms with small cash holdings prefer unused credit lines to cash when they get more profitable; whereas firms with large cash holdings prefer cash to unused credit lines when they get more profitable. Fourth, we find evidence of nonlinearities regarding the determinants of cash holdings and credit limits. Finally, our analysis also includes the effects of aggregate financial uncertainty on liquidity management, and it discriminates between holdings of local currency denominated and foreign currency denominated credit limits. Our study is the first one to examine liquidity management of firms in an emerging economy, and bears some critical differences with the findings of earlier studies.