Value of cash during downturn

Abstract

This study investigates the value of cash holdings among Asian firms: Thailand, The Philippines, Taiwan and Indonesia, which were affected by 1997 Asian financial crisis. Moreover, firms from Australia and New Zealand are analyzed as a comparison. For 3,717 firms from 6 countries between 1991and 2005, the findings indicate that the 1997 Asian financial crisis has impact on firms in Asian countries. Firms’ cash holdings do not contribute more to the value of firms during crisis period. Furthermore, the high level of cash has the same impact on firm value between crisis and non-crisis period. Although firms do not gain advantage from cash holdings, they do not lead things getting worse. Indeed, the findings lend support to free cash flow theory. After examining the investment rates among high cash Asian firms, the findings indicate that investment rates among high cash Asian firms are lower than low cash Asian firms during post-crisis period (i.e., recovery period). Moreover, the findings from examining the recovery rates (market valuation, dividend payout and return on assets) indicate that the market valuation of high cash Asian firms is not different from those low cash Asian firms during recovery period. However, high cash Asian firms are likely to pay dividends higher than those low cash Asian firms during pre-crisis period (i.e., normal period) and these patterns remain even after affected by the 1997 Asian financial crisis. For profitability (return on assets), high cash firms are not different in utilizing the assets to generate profit comparing to those low cash firms during recovery period.