The non-linear impact of financial leverage on cash holdings: Empirical evidence from Vietnam

Abstract

This article examines the non-linear relationship between financial leverage and cash holdings in the emerging market context—Vietnam. We use the dynamic model with the system generalized method of moments (SGMM) estimator and the comprehensive data set of stocks listed on the Vietnamese stock market from 2007 to 2019. The database is collected from accounting data related to 513 Vietnamese firms’ characteristics and provided by Fiin Pro. We indicate that financial leverage exerts a negative impact on cash holdings at low levels, but the relationship becomes positive at high levels of financial leverage. We further find that short-term and long-term debt are non-linearly related to cash holdings. Our findings offer implications for managers to operate their firms at different levels of financial leverage. Firms at low levels of financial leverage should tend to hold less cash and issue debt since the addition of debt to adapt investment and operation could maximize corporate value. In contrast, firms at high levels of financial leverage could hoard cash to mitigate the likelihood of financial distress, bankruptcy and to reserve borrowing capacity because such firms are more likely to experience financial distress and go bankrupt. Policymakers could draw up policies to reduce the likelihood of experiencing financial distress and bankruptcy, such as the decrease of the debt financing and the increase of the likelihood of equity financing.