Corporate Liquidity in Emerging Markets : A Retrospect of Asian Financial Crisis

The study investigates corporate liquidity (cash holdings) in emerging markets (Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Thailand, and Taiwan) from 1990 to 2006. Using the Asian financial crisis as the backdrop, I find that firms generally hold more cash after the crisis. In addition, the Asian crisis also had indirect impact on corporate liquidity because it generally changed the sensitivity of corporate liquidity to its benchmark determinants. In particular, cash and debt have become substitutable after the crisis. The propensity to retain cash from earnings and hoard cash for the upcoming investment opportunities also has become stronger after the crisis. Furthermore, my results suggest that it would be beneficial for firms to increase cash holdings as much as possible after the crisis because cash is value-enhancing regardless of the cash level. This is in contrast to the pre-crisis period when there is optimal cash level, meaning that holding too much cash is detrimental to firm value. Lastly, I show that countries that were less involved in the crisis are characterized by firms with larger amount of liquid assets (i.e., cash holdings and net working capital), larger total assets, stronger anti-director rights, lower business risk and indebtedness, as well as nonpayment of dividends by firms. Overall, my results suggest that corporate liquidity is important and should not be ignored at any time