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Firm Investment, Liquidity, and Bank Health: A Panel Study of Asian Firms in the 2000s

Author

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  • Kazuo Ogawa

    (Osaka University)

Abstract

The purpose of this study is to investigate how firms responded to the deterioration of bank health during the financially turbulent periods in the 2000s in making investment decisions and in meeting demand for liquidity. A rise in uncertainty regarding the ability to obtain external funds may have induced firms to rely on internal funds to finance investment activities. Therefore, we shed light on the cash flow sensitivity of investment and cash holdings by estimating firm- level investment and cash holdings equations using panel data for Asian firms in the 2000s. Our sample firms are from countries at different stages of financial development. The sample enables us to analyze the different roles played by internal funds in the financial and investment policy of firms in a financial environment with different stages of development. We find that the cash flow sensitivity of investment and cash holdings rises as bank health deteriorates. Moreover, the impact of non-performing loans on the cash flow sensitivity of investment and cash holdings is more prevalent across firms, irrespective of firm age, in countries with a higher level of financial intermediary development. Our findings suggest that as financial intermediaries develop, firms become more dependent on bank credit so that bank-dependent firms are more vulnerable to external shocks that hit the financial system. Therefore, when bank health is impaired, bank-dependent firms increase their reliance on internal funds and raise their propensity to save cash flow to materialize potentially profitable investment opportunities in the future.

Suggested Citation

  • Kazuo Ogawa, 2013. "Firm Investment, Liquidity, and Bank Health: A Panel Study of Asian Firms in the 2000s," ADB Economics Working Paper Series 338, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0338
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    Cited by:

    1. Shahbaz, Muhammad & Bhattacharya, Mita & Kumar, Mantu, 2017. "Financial Development, Industrialisation, Urbanisation and the Role of Institutions: A Comparative Analysis between India and China," MPRA Paper 81609, University Library of Munich, Germany, revised 14 Sep 2017.
    2. Roristua Pandiangan & Etty Murwaningsari, 2020. "Effect of Investment Decision and Tax Management on Stock Liquidity," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 9(3), pages 64-77, July.
    3. Charles Yuji Horioka & Akiko Terada-Hagiwara, 2014. "Corporate Cash Holding in Asia," Asian Economic Journal, East Asian Economic Association, vol. 28(4), pages 323-345, December.

    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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