Firm value, corporate cash holdings and financial constraint: a study from a developing market

Abstract

This paper investigates the nonlinear relationship between firm value and corporate cash holdings in a sample of non-financial Vietnamese firms from 2008 to 2013. We focus on both static and dynamic regressions to test for a nonlinear relationship. Our results reveal an ‘inverse U-shape’ relationship between firm value and cash holdings, which is in line with trade-off theory. Specially, we further test whether the optimal cash level changes under different financial conditions. In turn, this paper shows evidence of a nonlinear relationship between firm value and cash holdings under different financial circumstances and that each type of firm will adjust its optimal cash level based on business conditions.