Corporate Liquidity: Evidence from Islamic and non-Islamic Countries

This study examines whether and how Islam has bearings on corporate liquidity (cash holdings). A review of 34,895 non-financial firms from 68 countries (12 Islamic countries and 56 non-Islamic countries) for the period 1996 -2011 reveals that cash is lower in Islamic countries than in non-Islamic countries. The positive effect of growth opportunities on cash is also weaker in Islamic countries than in non-Islamic countries, thereby indicating lower propensity to hoard cash for upcoming growth opportunities in the former than in the latter likely because corporate governance is stakeholder-based such that shareholder wealth maximization is not the corporate objective in Islamic countries. Furthermore, the negative effect of debt issuance on cash is stronger in Islamic countries than in non-Islamic countries, thereby signifying higher effectiveness of debt in reducing agency cost in the former than in the latter.