Corporate Liquidity: Evidence from Islamic and non-Islamic Countries

Year 2020, Volume: 6 Issue: 3, 249 - 292, 30.11.2020

Naiwei Chen Tsai-chen Yang

https://doi.org/10.25272/ijisef.644501

Abstract

This study examines whether and how
Islam has bearings on corporate liquidity (cash holdings). A
review of 34,895 non-financial firms from 68 countries (12 Islamic countries
and 56 non-Islamic countries) for the period 1996 -2011 reveals that cash is lower in Islamic countries than in non-Islamic countries.
The positive effect of growth opportunities on cash is also weaker in Islamic
countries than in non-Islamic countries, thereby indicating lower propensity to
hoard cash for upcoming growth opportunities in the former than in the latter
likely because corporate governance is stakeholder-based such that shareholder
wealth maximization is not the corporate objective in Islamic countries.
Furthermore, the negative effect of debt issuance on cash is stronger in
Islamic countries than in non-Islamic countries, thereby signifying higher
effectiveness of debt in reducing agency cost in the former than in the latter.

Keywords

Corporate liquidity, Cash holding, Islam

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