The variables exist in model (1) as SIZEit, LEVit

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.

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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.