Corporate liquidity : evidence from Islamic and non-Islamic countries

Abstract EN

This study examines whether and how Islam has bearings on corporate liquidity (cash holdings).

A review of 34,895 non-financial firms from 68 countries (12 Muslim majority countries and 56 other countries, which consist of 26 developing and 30 developed countries) from 1996 to 2011 reveals that cash holdings are lower in Muslim majority countries than in other countries, particularly developed countries.

This phenomenon appears to be more pronounced when financial development is high or anti-director rights are weak in Muslim majority countries.

The lower cash holdings in Muslim majority countries can be explained by the modifying effect of Islam and Sharia compliance (SC) on cash determination.

Specifically, the negative effect of leverage on cash is stronger in Muslim majority countries than in other developing countries when financial development is high, financial structure is market-based, or national governance is strong in the former.

Moreover, SC has a direct and negative effect on cash, which is more pronounced when financial development is low, financial structure is bank-based, or anti-director rights are weak in Muslim majority countries.

Furthermore, SC negatively affects cash through growth opportunities and dividend payment.

Specifically, SC weakens the positive effect of growth opportunities on cash when financial structure is market-based.

SC also weakens the positive effect of dividend payment on cash, and such a modifying effect is stronger when anti-director rights are weak.

Overall, the results suggest the uniqueness of the cash policy in Muslim majority countries compared with other countries.