Speed of adjustment of liquid assets: the case of Casablanca Stock Exchange listed companies

Abstract

This paper investigates how publicly listed Moroccan companies adjust their liquid asset levels to reach an optimal balance. We apply a partial target adjustment model, based on the work of Ozkan and Ozkan (2004), and estimate it using the Generalized Method of Moments (GMM), which accounts for potential endogeneity in the explanatory variables. The study draws on a sample of 38 non-financial companies listed on the Casablanca Stock Exchange over the period from 2013 to 2021. Our results show that Moroccan listed companies adjust their liquid assets to converge towards an optimal balance, influenced primarily by two key factors: leverage and financial distress. Specifically, we identify a non-monotonic relationship between leverage and liquid assets. At lower levels of leverage, debt acts as a substitute for liquid assets, while at higher levels of leverage, this relationship becomes complementary, with an increase in liquid assets to mitigate default risk. Additionally, our findings reveal that cash flows act as a potential substitute for liquid assets, reducing the need for firms to maintain high levels of liquidity. However, the relationship between firm size and liquid assets presents an unexpected dynamic. Contrary to theoretical expectations of economies of scale, we observe a diseconomy of scale, where larger Moroccan companies tend to hold more liquid assets. In conclusion, while our analysis provides valuable insights into corporate liquidity behavior, there are limitations to consider, particularly the lack of data on governance structures and the absence of international comparisons. These limitations suggest promising avenues for future research to further explore the determinants of corporate liquidity in emerging markets and expand the scope to other regions.

Keywords : Liquid Assets, Leverage, Corporate Finance, Dynamic Panel Data, GMM.

Classification JEL : G300, G320

Paper type : Empirical Research