Cash holdings and cash flow uncertainty

In light of increasing global financial market volatilities, firms are encountering a more uncertain cash flow than ever. To avoid missing investment opportunities, firms will hold cash as a precautionary measure. We investigate whether cash holdings in Taiwanese firms is indeed driven by the uncertainty of cash flow. Our empirical results confirm that uncertainty of cash flow is the most important factor that explains why firms hold cash. In addition, we found that the influence of cash flow uncertainty in cash holdings is asymmetric between better and poorer earnings sampled firms; that is, firms hold more (less) cash when their cash flows are more volatile at relatively better (poorer) earnings. Moreover, we verify that above results are not affected by a firm’s financial constraints or quality of corporate governance. Our contribution is to provide the first observation that cash-flow volatility plays the key role in explaining a firm’s cash holding. Our study is particularly meaningful for countries such as Taiwan that has smaller firms and highly uncertain business operations originating from increasingly global financial market turbulence and political disturbances. Our empirical results could serve as a useful reference for countries with shallow-plate markets, such as those in South East Asia.