The research

believes the optimal cash holding level is available. Therefore, it is going to

test whether the assumption exists or not. The square of CASH (CASH2)

and CASH are two independent variables affect mainly to the market value in

firm i at time t, as well as control variables.

where Vit,

also called firm value is the dependent variable and the others are independent

variables consist of CASHit, representing for the ratio of cash and cash

equivalents to total assets on firm. The proportion of intangible assets and

total assets is noted as INTANGIBLEit, it is responsible for changing of the

growth opportunities. SIZEit is the size of firm i at t time and LEVit

is the leverage of firm. ?i is the unobservable heterogeneity which measures

both firm’s particular characteristics and the characteristics of the sector in

which they operate. ?t (dummy variable or indicator variable)

takes the value 0 or 1 to indicate the absence or presence of some categorical

effect that may be expected to shift the outcome. It changes in time

but are all equal for all firms in each of the periods considered. ?it

is the error term.

To eliminate the endogenous effect and unobservable

heterogeneity problems, GMM two-steps was employed. GMM method of estimation

followed Arellano and Bond (1991) to estimate the first differences of the

model. This method ignores layers of effects, backing the results to the pure

form. Due to the fact that firms are heterogeneous, and there are always

elements influencing the firm value that falsify the outcome (Himmelberg,

Hubbard & Palia, 1999). Furthermore, the endogeneity problem has often

been examined in cash literature (i.e Ozkan & Ozkan, 2004).

There is an assumption that no second-order serial

correlation can be found in the errors in first differences. Supporting this

assumption, this paper follows the test for the absence of the second-order

serial correlation tendered by Arellano and Bond. Furthermore, it is proposed

that Sargan-test is the technique to check the over-identifying restrictions

testing for the unavailability of correlation between instruments and the error

term. This paper’s framework is followed by the the public research “Corporate

cash holding and firm value” of Cristina Martinez-Sola, Pedro J.Garcia-Teruel

and Pedro Martinez-Solano. In the model (1), its result is positive CASH and

negative CASH2 for all proxies at significant level 5% and 10%.

It is the expectation we are looking for.

All estimations

have been carried out using the two-step GMM estimator. All variables are

treated as endogenous and the lagged independent variables are used as

instrument. In column (1) the dependent variable is MKBOOK1, which is firm’s

market value over total assets. In column (2) is another proxy of firm value

MKBOOK2, which is the ratio of market capitalisation to book value of equity.

CASH and CASH2 measure cash holding. Control variable are SIZE,

INTANGIBLE and LEV. Time dummies are included in all regressions.

Sargan test is

a test of overidentifying restrictions, distributed as chi-square under the

null of instrument validity.

Table 3

reveals the results of the estimation of model (1) using two proxies for firm

value instead of three as the original. It sequentially shows the correlation

between MKBOOK1 and MKBOOK2 and independent variables in column one and two.

Fortunately, our outcomes have the same results which have CASH’s coefficient

is not contradictory with firm value and CASH2’s

coefficient gainsays. In column 1 (MKBOOK1) CASH is larger than zero, matching

with the expectation and CASH2 is a negative value. In column 2 (MKBOOK2) the

result is as same as the previous one. All of numbers in table proved that

there is an optimal point where holding amount of cash can maximizing the value

of firm. The model (1) shows the non-linear regression with U shape parabola.

Moving along horizontal axis (CASH), the firm value grows up sustainably until

meeting the optimal point of holding cash. At this point, the firm value is

maximized. However, if the cash on firm is larger than the cut-off point, it

decreases the firm value by increasing one unit of cash. The optimal point can

be determined by mathematics method of quadratic function. It equals to the

ratio of ?1 to -2?2. Following the formula, consequently 58.9% and 16.4% are

the value of breaking-point in column 1 (MKBOOK1) and 2 (MKBOOK2). Last but not

least, the best level of cash holding on average is around 37% termination of

cash holding is necessary for all firms while implementing the maximizing

corporate value strategy. It helps board of directors manage and invest well in

long term, because the balance is one of factors maintains a good operational

organization.

According to control variables, SIZE and LEV have the

positive relationship with MKBOOK1 and MKBOOK2, while the growth opportunity

(INTANGIBLE) is contrary with them.