The previous

model has demonstrated there is a quadratic relation (concave) between firm

cash holdings and firm value, for this we have two contrary effects. The main

core in this section is support the evidence that the firm value will not be

maximizing when it is not on the point of optimal cash holding level.

Holding cash always exist cost but after offsetting if the

cost is still lower than the benefit, it is a good choice for firm to keep or

increase their value. That case happens when amount of cash is under the

optimal point. Explaining in another way, the change of firm value when the

cash amount increased by one unit. However, the market will not place the high

value for firm when it stores enormous cash which crosses over the optimum.

Tong’s methodology will be used to analyze whether deviation from optimal point

will reduces the firm value or not. We will replicate the method from the

original of Tong which empirically tests the transaction cost theory of

managerial ownership and firm value predicts that deviations from optimal

managerial ownership reduce firm value. Due to the result of model (1), the

movement of cash amount causes deviation surely decreases the value of firm.

Because optimal cash holding level is the highest plot to maximize the firm

value, increasing or decreasing cash does not make the firm value is on its

ultimate point. Tong’s methodology (2008) also states that above-optimal or

below-optimal deviation reduce firm value. For this reason, in model (2) CASHit

is seemed as dependent variable and depends on control variables exist in model

(1) as SIZEit, LEVit and INTANGIBLEit. Moreover, we also

used CFLOWit, LIQit and BANKDit to derives this

model.

with notion

of CASHit is the ratio of cash and cash equivalent to total

assets; CFLOWit is the ratio between profit after tax plus

depreciation and gross sales; LIQit is the liquidity assets which is calculated as

working capital less total cash and short term investment divided by firms’

total assets; LEVit is the leverage, it is introduced in the first

model; SIZEit is the size of firm, it is similar to the SIZEit

in model (1); in additionally, BANKDit is the new added variable in this model to

measure the ratio of bank loans to total debt; finally, INTANGIBLEit

proxies for growth opportunities and is calculated as intangible assets divided

by total assets; ?i is the unobservable heterogeneity; ?t

represents for dummy variables and ?it is the error term.

The existence of model (2) is a buffer state to define the

residuals. It consists of all residuals after eliminating CASH and CASH2

(model (3)). Getting the absolute value of residuals, we have DEVIATIONit.

This DEVIATIONit is a dependent variable of model (2) and it is a

signal to prove firm value will change whether this variable moves away from

the optimum. Following this situation, we generate the model:

where Vit is the

firm value, proxied as MKBOOK1 and MKBOOK2. DEVIATIONit is the

dependent variable from absolute value of model (2); INTANGIBLEit,

SIZEit, LEVit are control variables defined as above.

The hypothesis used to test

here is ?1 < 0 which reveals the evidence that DEVIATIONit has a
negative relation to the firm value.
All estimations
have been carried out using the two-step GMM estimator.
All variables
are treated as endogenous and the lagged independent variables are used as
instrument. In column (1) the dependent variable is MKBOOK1, which is firm's
market value over total assets. In column (2) is another proxy of firm value
MKBOOK2, which is the ratio of market capitalisation to book value of equity.
DEVIATION is the absolute value of residuals from optimal cash holding level
regression. Control variable are SIZE, INTANGIBLE and LEV. Time dummies are
included in all regressions.
Sargan test is
a test of overidentifying restrictions, distributed as chi-square under the
null of instrument validity.
The above
table shows the coeffecient between proxies of firm value (MKBOOK1 &
MKBOOK2) and the right-side variables of equation where explain whether
deviations from optimal cash holding influence firm value represented by
proxies. The results in column 1 match with the expectation, the coefficient of
MKBOOK1 and DEVIATION is negative and the confidence interval is correct at
95%. It is a good signal to demonstrate that the corporate value will be no
longer maximum when it is not at the optimal point. Nevertheless, the MKBOOK2
column does not react as we expect and the p-value is also meaningless. Thus,
the coefficient of MKBOOK2 and DEVIATION does not correlated to the firm value.
In order to clear the way in which both deviations, over
and under the optimal cash level, affect firm value, we continuously produce a
new model adding a new variable (INTERACTION) to distinguish above or below the
optimal point. INTERACTION equals to Above-optimal*DEVIATION. Using dummy
variable method for variable Above-optimal which will take 1 when it is a
positive number and vice versa will be equal to 0. With this, we have the
fourth model.
where
Vit is the firm value, proxied as MKBOOK1 and MKBOOK2. DEVIATIONit
is the dependent variable from absolute value of residuals and INTERACTIONit
defined as above; INTANGIBLEit, SIZEit, LEVit
are control variables defined as above.