GRANGER REPRESENTATION THEOREM AND COINTEGRATION ANALYSIS: A STUDY ON CORPORATE EARNINGS AND CASH HOLDIN GS

Abstract

This paper examines the relationship between earnings and cash holdings in the US market using Granger representation theorem and cointegration analysis from 2002 to 2022. The study finds that both cash holdings and earnings are non-stationary and co-integrated, suggesting that the levels of cash holdings and earnings depend on each other. However, the association is not symmetrical, as earnings rely on cash holdings to a greater extent than cash relies on earnings. The significance of the models with EBITDA as the dependent variable is more substantial than the models with cash as the dependent variable. The study further reveals that cash is impacted by a two-to-three-year lag of EBITDA, indicating that firms do not immediately increase their liquidity when given the opportunity. Instead, they seem to have a pipeline of worthwhile investment opportunities for approximately two to three years. The findings of this study contribute to corporate finance literature in demonstrating empirical evidence between cash and earnings, providing valuable insights for companies to make better-informed decisions about insurance, tax management, investment opportunities, and dividend policies