This dissertation studies the Economic and Monetary Union (EMU) and its effects on foreign exchange markets and corporate cash holdings. These two potential effects are examined in the dissertation in two separate essays. The first essay examines the validity of the purchasing power parity (PPP) condition during three distinct exchange rate regimes (floating-rate, target-zone arrangement, and fixed-rate or common currency) from January 1973 through January 2004. My results support PPP, but I find that PPP during the common currency regime holds in fewer EMU countries than during the alternative exchange rate regimes. In addition, PPP between currency blocs holds for all countries examined during the first two regimes, but deteriorates after the introduction of the euro for the EMU countries as opposed to the non-EMU countries. I do not obtain strong evidence supporting PPP for the EMU countries since the euro adoption, but the faster mean reversion I observe in the few EMU countries where PPP does hold, may signal higher market efficiency and economic integration in the future. The second essay investigates corporate liquidity (cash holdings of firms) from 15 European Union (EU) countries [12 Economic and Monetary Union (EMU) countriesthat adopted the euro, and 3 non-EMU countries] from 1993 to 2002 using a dynamic panel data model. My main contributions to the corporate liquidity literature are fourfold. First, I provide evidence that creditor rights also affect corporate liquidity and their effect is more consistent than that of shareholder rights. Second, I show that the recent formation of EMU affects corporate liquidity. Debt and net working capital are better substitutes for cash in EMU countries than non-EMU countries. The adoption of a common currency reduces cash holdings in EMU countries. Third, my results suggest that agency theory plays an important role in explaining corporate liquidity. In particular, the agency view explains corporate liquidity better for EMU firms, probably because of an enhanced capital market integration that weakens the transaction and precautionary motives of holding cash. Fourth, I show that dealing with the endogeneity problem in corporate liquidity studies is important.

This thesis examines the relationship between corporate liquidity and dividend policy. The corporate liquidity is measured by proven liquidity ratios and the dividend policy is divided into cash dividends and share repurchases. In order to examine the possible relationship between corporate liquidity and dividend policy, public European firms are examined. Denmark, France, Germany, Norway, Sweden, and the UK are selected based on the similarities in the regulation and market structure in the countries. The thesis aims at furthering the knowledge on the role played by corporate liquidity for dividend policy. In our ambition to investigate the before-mentioned relationship we use a panel data set over five years extracted from Datastream. Any newfound evidence on the subject can help investors, creditors, and other stakeholders in evaluating firms based on their liquidity.  We used a deductive quantitative method to analyse the chosen relationship. The study concluded a significant relationship between corporate liquidity and dividend, although negative as opposed to our expectations. With regards to share repurchase, no significant effect was found from corporate liquidity. Free cash flow on the other hand appears to have a positive effect on the amount of share repurchases carried through. We discuss mentioned relationships and attribute them to the mature firms in this sample and the liquidity levels of mature firms.The theories supporting these findings are Agency Theory, Pecking Order Theory, Shareholder Theory, Stakeholder Theory, Liquidity Preference Theory.

This study investigates the association between traditional and alternative working capital measures and the returns of industrial firms listed on the Johannesburg Stock E"change. Twenty five variables for all industrial firms listed for the most recent 10 years were derived from standardised annual balance sheet data of the University of Pretoria's Bureau of Financial Analysis. Traditional liquidity ratios measuring working capital position, activity and leverage, and alternative liquidity measures, were calculated for each of the 135 participating firms for the 1 0 years. These working capital measures were tested for association with five return measures for every firm over the same period. This was done by means of a chi-square test for association, followed by stepwise multiple regression undertaken to quantify the underlying structural relationships between the return measures and the working capital measures. The results of the tests indicated that the traditional working capital leverage measures, in particular, total current liabilities divided by funds flow, and to a lesser e"tent, long-term loan capital divided by net working capital, displayed the greatest associations, and e"plained the majority of the variance in the return measures. At-test, undertaken to analyse the size effect on the working capital measures employed by the participating firms, compared firms according to total assets. The results revealed significant differences between the means of the top quartile of firms and the bottom quartile, for eight of the 13 working capital measures included in the study. A nonparametric test was applied to evaluate the sector effect on the working capital measures employed by the participating firms. The rank scores indicated significant differences in the means across the sectors for si" of the 13 working capital measures. A decrease in the working capital leverage measures of current liabilities divided by funds flow, and long-term loan capital divided by net working capital, should signal an increase in returns, and vice versa. It is recommended that financial managers consider these findings when forecasting firm returns. / Business Management / D. Com. (Business Management)

This study investigates the association between traditional and alternative working capital measures and the returns of industrial firms listed on the Johannesburg Stock E"change. Twenty five variables for all industrial firms listed for the most recent 10 years were derived from standardised annual balance sheet data of the University of Pretoria's Bureau of Financial Analysis. Traditional liquidity ratios measuring working capital position, activity and leverage, and alternative liquidity measures, were calculated for each of the 135 participating firms for the 1 0 years. These working capital measures were tested for association with five return measures for every firm over the same period. This was done by means of a chi-square test for association, followed by stepwise multiple regression undertaken to quantify the underlying structural relationships between the return measures and the working capital measures. The results of the tests indicated that the traditional working capital leverage measures, in particular, total current liabilities divided by funds flow, and to a lesser e"tent, long-term loan capital divided by net working capital, displayed the greatest associations, and e"plained the majority of the variance in the return measures. At-test, undertaken to analyse the size effect on the working capital measures employed by the participating firms, compared firms according to total assets. The results revealed significant differences between the means of the top quartile of firms and the bottom quartile, for eight of the 13 working capital measures included in the study. A nonparametric test was applied to evaluate the sector effect on the working capital measures employed by the participating firms. The rank scores indicated significant differences in the means across the sectors for si" of the 13 working capital measures. A decrease in the working capital leverage measures of current liabilities divided by funds flow, and long-term loan capital divided by net working capital, should signal an increase in returns, and vice versa. It is recommended that financial managers consider these findings when forecasting firm returns. / Business Management / D. Com. (Business Management)