Abstract:
Corporate cash holdings (CCH) have captivated a lot of research in past years and
continue to be eminent in the corporate finance literature. CCH literature identifies
three preeminent motives for corporations to hold cash; “transactional, precautionary
and speculative motive” (Bates, Kahle, & Stulz, 2009; Opler, Pinkowitz, Stulz, &
Williamson, 1999; Ozkan & Ozkan, 2004). This study aims to explore the relationship
between stock liquidity (LIQ) and corporate cash holdings (CCH). This study also
explores the moderating impact of Corporate Governance (CG) on the relationship
between stock liquidity (LIQ) and corporate cash holdings (CCH) in Pakistan. The
study uses a generalized least square (GLS) random effects (RE) model to draw
inferences from data. The study uses two proxies of liquidity (LIQ), Amihud(2002)
illiquidity measure and turnover rate (TR). We use the corporate governance index
(CGI), which consists of 3 sub-indices namely, (1) board structure index (BODI), (2)
ownership structure index (OWNI), and (3) disclosure structure index (DISCI) as a
moderator. The findings of the study reveal that companies with liquid stocks hold
less cash after controlling for various firm characteristics. The findings of this study
show that the coefficient of Amihd(2002) illiquidity measure is not significant, hence
we do not find any relation between Amihud(2002) illiquidity measure and corporate
cash holdings (CCH) and (CGI) do not moderate their relationship. We find a
negative association between turnover rate (TR) and corporate cash holdings (CCH)
and corporate governance index (CGI) moderate their relationship.
