Cash Holding Levels and Partial Adjustments - Evidence from Three Asian Countries

Three issues are addressed in this paper; What are the important cash holding determinants? Do firms adjust cash levels toward their optimal ones? Do holding more cash contribute to stock return? The data covers between 1998 and 2008 for firms from Korea, Taiwan and Japan. We find that earning volatility, profits and asset tangibility are identified as the most important determinants for cash holding; and firms adjust cash levels toward their optimal ones. Our finding also indicate that high profit increases cash holding level. These three findings indicates that firms' cash holding behaviors can be explained by both the trade-off and pecking order theories. The relationship between cash holding and stock market return is not the same across the countries. We also observe substantial differences between countries in important cash holding level determinants and adjustment speed and patterns.