Determinants of Corporate Liquidity in Pakistan Incorporating the Role of Future Expectations and Coincident Macroeconomic Indicators

Abstract

This study targets on the relationship between various coincident macroeconomic indicators and cash holdings of firms in Pakistan economy. Panel fixed-effect least square regression model has been used by employing annual data of 264 nonfinancial KSE listed firms of Pakistan, gathered for the period of eight years 20062013. Using the framework of trade-off, precautionary motive and pecking-order theory, the findings revealed that cash flow advantage and size of the firm are the significant determinants of corporate liquidity in Pakistan. All coincident macroeconomic variables that comprise of credit spread, economic growth rate, government budget deficit, short-term interest rates, private credit and inflation have shown persistent significant impact on corporate liquidity in Pakistan economy. Moreover, the major contribution of  this study is the incorporation the role of future expectations about  macroeconomic conditions in economy as well and the results prove that these are also play a vital role in determining the cash  holdings of Pakistan firms.