Government Deficits and Corporate Liquidity

This study examines the relationship between government deficit and corporate liquidity (cash holdings). Using data of nonfinancial firms in Taiwan from 1981 to 2009, this study finds that corporate liquidity is lower when government deficit is higher. In addition, corporate liquidity is related with other macroeconomic conditions, such as inflation, short-term interest rate, and economic growth. More precisely, results indicate that inflation and interest rates have a negative impact on corporate liquidity that is aggravated when government deficit is higher. Economic growth has a positive impact on corporate liquidity, and such positive impact is weakened when government deficit is higher.