Differential cash constraints, financial leverage and the demand for money: Evidence from a complete panel of Taiwanese firms

Jin Tan Liu, Meng Wen Tsou, Ping Wang

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

This paper studies firms' demand for money by developing a differential-cash-constraint framework with firms' entire wage bills requiring cash in advance and a fraction of investment purchases being financed by credits. In addition to conventional scale and opportunity-cost factors, firms' financial status and profitability are crucial determinants for their money demand behavior. Employing a new data set consisting of a panel of Taiwanese firms over 1990-97, our econometric analysis lends empirical support to our theory. The estimates suggest that economies of scale in firms' cash management are present and that lower financial leverage or higher profitability raises money demand significantly.

Original languageEnglish
Pages (from-to)523-542
Number of pages20
JournalJournal of Macroeconomics
Volume30
Issue number1
DOIs
StatePublished - Mar 2008

Keywords

  • Financial structure
  • Firms' transactions use of money
  • Panel data estimation

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