Cash holding and systematic risk: A study of listed manufacturing firm in Vietnam

Abstract

The research studies how the relationship between cash holding and systematic risk through testing the correlation between systematic risk of stock and cash holding of firms listed on Vietnam Stock Exchange. The sample includes 134 enterprises listed on Vietnam Stock Exchange at the HOSE, HNX from the six year period of 2010-2015 to apply the theory to the reality of the business operations in Vietnam. In order to investigate this relationship, the level of corporate cash holdings is measured as cash to total assets ratio and stock beta are used to represent the risk of the stock. The thesis has conducted research data using OLS regression method and Spearman’s rank correlation. Besides, this study also used various tests such as multicollinearity; heteroskedasticity; and normality tests using SPSS. The empirical results showed that there was a negative significant relationship between systematic risk and cash holding by companies in the whole sample. The paper also carried out tests on the changing relationship between these two variables when divided sample into sub-samples with high and low market capitalization. A negative correlation between systematic risk and cash holding was recorded in small cap size, large-cap and mid-cap size. However, this relationship tends to be stronger when companies increase their market capital. This finding implicates that cash holding has an important role in mitigating investment risk then several implication to this relationship are given and connected to financial theories. Company reserve more cash can leads to a reduction in systematic risk, especially when the fluctuation in market is high. In addition, size of company can be considered in deciding cash holding policy.