Cash Holding, the Value of Cash Holding, and Corporate Life Cycle in Taiwan: An Examination of the Precautionary Motive Hypothesis

Building upon Keynes (1936) precautionary motive hypothesis, this paper tests how cash holding and cash value vary with corporate life cycle for firms listed on the Taiwan Stock Exchange (TWSE). By employing firm age as a proxy for corporate life cycle, we find that the ratio of cash holding decreases with firm age. Such a monotonic decreasing pattern in cash ratios can be explained by the precautionary motive hypothesis. Relative to mature firms, Taiwan's young firms tend to hold more precautionary-based cash due to greater industry-level volatility in cash flows, greater R&D intensity, and higher financing deficits, in which case adverse shocks and financial distress are more costly for them. Another key finding in this paper is that the value of cash holding also decreases with firm age, reflecting the fact that young firms are more financially-constrained than are mature firms in Taiwan. Overall, our results are consistent with the prediction of the precautionary motive hypothesis.