A Study of a Causality Relationship between Firm Investment and Cash Holdings: An Empirical Validation from French, Germany and Italy

Abstract

This paper tests the causality interdependence between firm investment and cash holdings. Our study analyzes three countries: French, Germany and Italy. The samples contain 84 firms for each country over a period of 8 years from 2003 to 2010. Cash is measured, alternatively by two ratios; cash and cash equivalents over total assets, and quick ratio approximated by cash and cash equivalents over current liabilities. Firm investment is approximated by tangible fixed assets growth rate and total assets growth rate. As control variables: profitability, leverage, size and firm age. Using a data panels method, the causality relationship is not checked for all countries. However, for French and Italy markets, we conclude to a causality relationship for the service and agriculture and mining sectors, respectively.