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This paper studies the relationship between corporate liquidity and diversification. Researcher develop a measurement related to company diversification through cross-divisional correlation in investment opportunity and cash flow and also intra-divisional correlation between investment opportunity and cash flow. The measurement used is where investment opportunity is measured through Tobin’s Q proxy and cash flow is measured with earnings less interests and taxes proxy. Also, this research performs measurement in cash holdings and companies experiencing financial constraint, where cash holdings measured by using cash/assets proxy, while financial constraint measured using payout ratio and firm size proxies. The key finding is that diversified firms hold significantly more cash than stand-alone firms because they are diversified in their cash flow. Lower cross-divisional correlations in cash flow and lower correlations between investment opportunity and cash flow correspond to higher cash holdings. Even in financially constrained firms, the increases of diversification degree through correlations in cash flow and correlations between investment opportunity and cash flow also correspond to higher cash holdings. These results show that the agency motive for cash holdings appears to explain the increase in the corporate cash holdings which means cash may needed in order to make an internal financing to overcome the cost made by agency when companies experiencing financial constraint. Keywords—cash holdings, corporate diversification, financial constraint, cash flow, investment opportunity.

The Analysis of Corporate Diversification and Cash Holdings: A Study on Non-Financial Companies Listed in the Indonesian Stock Exchange during the Period of 2006-2015