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Impact of Macroeconomic Factors on Cash Holdings?: A Dynamic Panel Model

Author

Listed:
  • Lalita Anand
  • M. Thenmozhi
  • Nikhil Varaiya
  • Saumitra Bhadhuri

Abstract

We examine if macroeconomic factors impact cash holdings and how it influences the speed of adjustment of cash to target levels using the Arellano-Bover/Blundell-Bond dynamic panel model. We analyse a balanced panel and find that exchange rate, stock market index and oil price shocks impact cash holdings positively. We also observe that firms hold more cash in expectation of GDP growth, oil price shocks, increase in credit spread, budget deficit and hold marketable securities in expectation of inflationary conditions in the economy, while they hold less cash in expectation of an increase in exchange rate and increase in long-term and short-term bond rates. We further substantiate that cash holdings in firms adjust to target cash reserves in a dynamic process. We provide strong evidence that macroeconomic policy decisions impact cash levels in firms.

Suggested Citation

  • Lalita Anand & M. Thenmozhi & Nikhil Varaiya & Saumitra Bhadhuri, 2018. "Impact of Macroeconomic Factors on Cash Holdings?: A Dynamic Panel Model," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(1_suppl), pages 27-53, April.
    • Handle: RePEc:sae:emffin:v:17:y:2018:i:1_suppl:p:s27-s53
    DOI: 10.1177/0972652717751536
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