Does Cash Hoarding Represent Excessive Conservatism or Opportunism of CEOs in pre-and post- crisis of 2008?

Abstract

The aim of this paper is to define and isolate the drivers of speculative cash hoarding phenomena in publicly traded non-financial American firms before and after the financial crisis of 2008. The model presented in this paper uses previous literature defined drivers of transaction and precautionary motives for holding cash as control variables, and introduces new measures for market endorsement and economic conditions, that were never used before in this context. Empirical results show that cash accumulation is prominent among profitable firms, and that cash accumulation in excess of ongoing and precautionary needs of companies was endorsed by the financial markets both before and after the financial crisis of 2008. Results also support previous findings that financially unconstrained firms have a lesser need for market endorsement for cash hoarding. The contribution of this paper to the body of literature related to cash management and cash hoarding is five-fold: (i) it provides empirical evidence of market-endorsed cash hoarding in the US non-financial companies; (ii) it extends the existing models of transaction-related cash holdings to include, formally define and test the drivers of precautionary cash accumulation in the non-financial sector; (iii) it formally defines and tests a metric for market sentiment related to cash hoarding before and after the financial crisis of 2008; (iv) provides empirical evidence that the crisis of 2008 was anticipated by the corporate sector as early as 2005, and recovery from the crisis was predicted as early as Q2:08; and (v) defines and quantifies the border separating the precautionary and speculative motives for cash accumulation.