The tendered by Arellano and Bond. Furthermore, it is

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.

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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

According to control variables, SIZE and LEV have the
positive relationship with MKBOOK1 and MKBOOK2, while the growth opportunity
(INTANGIBLE) is contrary with them.