Cash Holding Deviation and Speed of Adjustment of Indonesian Firms

Arni Surwanti

 DOI : https://dx.doi.org/10.18535/ijmei/v3i11.06

 

ABSTRACT

Every corporate need cash. Corporate cash holdings always involve a trade-off between benefits and costs. Companies must hold cash on hand for different reasons such for the requirement of liquidating current assets to make payments of the companies transactions, dealing with unpredicted events, and so on. On other hand liquidity has high potential costs that will reduce corporate profit. Cash is unproductive asset that have small added value. In this study has some specificity. First, this research analyses determinant of optimal cash holding in Indonesian Firms. The Second this research to identify the deviation of Indonesia Firms’ cash holding from the targeted level and identify speed of adjustment to reach the targeted cash holding of Indonesian firms.

This research use panel data of Indonesian non-financial listed firms in Indonesian Stock Exchange during the period 2000-2015 with dynamic model.  Cash holding  of the firm may deviate from the targeted, it is because of adjustment cost. Panel regression analysis has been conducted to determine the major factors affecting cash holdings.  these variable are Growth, Firm Size, Leverage, Profitability, Dividend, and Asset tangibility. The Formula is  CH*i,t = f(Growth, Size, Lev, Prof, Div, Tang)). The adjustment of the firms for target level cash cannot be immediately achieved due to the associated adjustment costs. The speed of adjustment equation are:  

CHi,t -  CHi,t-1 = αi (CH*i,t  - CHi,t-1) or CHi,t =(1- αi )CHt-1 + δi,tCH*i,t

Corporate cash holdings always involve a trade-off between benefits and costs. Companies must hold cash on hand for different reasons, but on other hand, over cash holding have consequences.  On other hand liquidity has high potential costs that will reduce corporate profit. Cash is unproductive asset that have small added value. The companies in Indonesian need to balance of the benefit and the consequences of cash holding. The optimal Cash holding in Indonesia determined by firm characteristics