Financial Deepening, Trade Credit And Corporate Cash Holding: International Evidence

Cash management is vital in corporate operation. Firms hold cash to cope with payables and decrease cash holding with receivables, which function as a substitute for cash. In addition, economic entities' financial deepening influences firms' cash holding behavior. Existing papers study firms' cash holding behavior in one economic entity. We aim at studying the relationship between financial deepening, trade credit and cash holding with international evidence.After summarizing previous study on relationship between trade credit and cash holding, we adopt empirical test. We use global listed company data from 1990 to 2013, including 85 economy entities, 29,549 companies and 294,846 samples. Financial deepening indicators cover stock market, bank credit and economy and finance freedom situation.From empirical results, in economic entities with high level of financial deepening, firms can easily get loans so that they can hold relatively less cash to cope with same amount of payables. Meanwhile, firms decrease more cash with same amount of receivables. Cash holding to cope with trade credit is typical transaction demand for money. It is found that in economic entities with high level of financial deepening, firms hold less cash to cope with trade credit. In addition, in economic entities with high level of financial deepening, interest rate is usually lower; so that speculative and prudent demand for money is higher.In countries with well-developed stock and credit market, firms can get better financial service, decreased transaction demand for money plays a leading role, so that firms hold less cash. In countries with more free financial system, firms' investment and financing decisions are less intervened, so that firms are more sensitive to interest rate. Therefore, firms' incresed speculative and prudent demand for money plays a leading role, so that firms hold more cash.