Why Asian firms hold cash

Charles Yuji Horioka, Akiko Terada-Hagiwara

25 January 2014



In many, if not most, economies, sharp declines in household saving rates have been offset by sharp increases in corporate saving rates for the past two decades (see, for example, Karabarbounis and Neiman 2012). Even so, relatively little research has been done on the determinants of corporate saving.

The topic of this column is cash holdings of firms, which are an important and the most liquid component of corporate saving. The existing literature concludes that cash remains ‘king’, at least for certain groups of firms, and that debt capacity does not provide the same degree of downside protection (Almeida et al. 2013). Therefore, this column considers why firms hold cash, and what determines how much cash firms hold, with particular attention to Asian firms.

Why firms hold cash

A firm that is not financially constrained will not necessarily increase its cash holdings in response to an increase in its cash flow, and may use the entire increase in its cash flow to finance current investment, because it knows that it will be able to finance future investment using external funds without any difficulty. However, a firm that is financially constrained will use at least part of the increase in its cash flow to increase its cash holdings, so that it will be able to increase its future investment without relying on external funds. Thus, an increase in cash flow will cause financially constrained firms to save more in the form of cash (that is, the ‘cash flow sensitivity of cash’ of financially constrained firms will be positive) – the hypothesis discussed in Almeida et al. (2004).

Previous empirical studies

This hypothesis is supported by existing empirical studies, but the results appear to be sensitive to the estimation method used. For example, Almeida et al. (2004), using a large sample of US manufacturing firms for the period 1971–2000, regress the increase in cash holdings on cash flow and other variables, and find that the coefficient of cash flow is statistically insignificant for unconstrained firms but that it is positive and statistically significant for financially constrained firms. This holds regardless of which criterion (payout ratio, asset size, bond ratings, commercial paper rating, or an index of firm financial constraints) is used to partition firms into constrained and unconstrained firms. Khurana et al. (2006) add empirical evidence supporting the hypothesis using firm-level data on 35 countries from throughout the world. However, Riddick and Whited (2009) find – using firm-level data for Canada, France, Germany, Japan, and the US – that the results are sensitive to the estimation method used, and that the results based on the preferred estimation method fail to support Almeida et al.’s (2004) hypothesis.

Results for Asian firms

To the best of our knowledge, our paper (Horioka and Terada-Hagiwara 2013) is the first to test Almeida et al.’s (2004) hypothesis focusing on Asian economies while also addressing the econometric issues identified by Riddick and Whited (2009). Moreover, we include several economies not included in previous studies, such as the People’s Republic of China, Hong Kong, and Vietnam. We estimate the cash flow sensitivity of cash as in Almeida et al. (2004) using firm-level data for 11 Asian economies (Australia, Indonesia, Japan, the Republic of Korea, Malaysia, the Philippines, Singapore, Thailand, and the three aforementioned economies) for the period 2002–2011. We find that the impact of cash flow on the increase in cash holdings is positive and statistically significant, and that its impact is larger and more highly significant in the case of smaller firms, in both the developed country sample and the developing country sample. Since smaller firms are more likely to be financially constrained than larger firms, these results suggest that Almeida et al.’s (2004) theoretical analysis is applicable in the case of Asia as well. Moreover, these results suggest that Asian firms, especially smaller ones, are financially constrained, and that they save more when their cash flow increases so that they will be able to finance future investments.

Policy implications

Turning to policy implications, our findings suggest that the saving and investment behaviour of Asian firms is heavily influenced by financial constraints, and that financial sector development would reduce the need for liquid saving in the form of cash holdings, especially in the case of smaller firms. It is important to note that the financial sector development to which we are referring here should not be limited to traditional markets such as debt and equity, as ‘liquidity’ is of central importance to efficient investment, as noted by Almeida et al. (2013). Recent studies have documented that the existence of more liquid instruments, such as credit lines and derivatives-based hedging, can add substantially to a firm’s liquidity. Firms that hold undrawn credit lines are found to hold some cash, but firms without access to credit lines are found to hold significantly more cash than the average firm. Relaxing the financial constraints of firms through the introduction and expansion of such instruments would allow firms to invest cash flows more efficiently in physical assets when there are profitable projects by reducing the need for cash holdings. This, in turn, would cause the saving and investment gaps of firms – which have been largely positive in many of the countries in our sample – to narrow.


Almeida, H, M Campello and M S Weisbach (2004), “The Cash Flow Sensitivity of Cash”, Journal of Finance, 59(4): 1777–1804.

Almeida, H, M Campello, I Cunha and M S Weisbach (2013), “Corporate Liquidity Management: A Conceptual Framework and Survey”, NBER Working 19502.

Horioka, C Y and A Terada-Hagiwara (2013), “Corporate Cash Holding in Asia”, NBER Working Paper 19688.

Karabarbounis, L and B Neiman (2012), “Declining Labor Shares and the Global Rise of Corporate Savings”, NBER Working Paper 18154.

Khurana, I K, X Martin and R Pereira (2006), “Financial Development and the Cash Flow Sensitivity of Cash”, Journal of Financial and Quantitative Analysis, 41(4): 787–808.

Riddick, L A and T M Whited (2009), “The Corporate Propensity to Save”, Journal of Finance, 64(4): 1729–1766.



Topics:  Financial markets

Tags:  investment, Asia, saving, financial frictions, savings, corporate saving, borrowing constraints

Vice-President and Professor, Asian Growth Research Institute (AGI), Kitakyushu City, Japan; Invited Professor, Osaka University

Senior Economist, Macroeconomics Research Division, Economics Research and Regional Cooperation Department, Asian Development Bank