The Effect of Financial Constraint Indexes on Risks Associated With Excess Cash Holdings

Document Type : Original Article

Authors

1 Department of Financial Management, Rasht Branch, Islamic Azad University, Rasht, Iran.

2 Department of Accounting, Rasht Branch, Islamic Azad University, Rasht, Iran.

3 Department of Marketing Management, Rasht Branch, Islamic Azad University, Rasht, Iran.

4 Department of Financial Management, Payam Noor University, Rasht, Iran.

Abstract

The Purpose of this Paper to examine the effect of firm financial constraint indexes on the risks associated with the excess cash holdings, considering the Stock Trading Continuity Index. In this study, two criteria for liquidity risk are used to measure risk, which include twelve-month liquidity risk and beta liquidity risk. Also in this research, multivariate regression and ordinary least squares method are used in order to test the hypotheses. The research sample includes 130 companies of listed companies in Tehran Stock Exchange that is seven-year period from the beginning of 2011 until the end of 2017. The research results show that financial constraints due to the size of the company, pay-out ratio, and the WW index of Whited Wu affects the relationship between liquidity risk and excess cash holdings and improvement of the stock trading continuity associated with excess cash holding is greater for financially constraint firms. But the amount of the cash coefficient for the KZ Index of Kaplan Zingales is almost the same for the constrained and unconstrained firms. Overall, the results show that the liquidity risk reduction associated with the excess cash holdings is greater for financially constraints firms.

Keywords