Peer effects on corporate cash holdings

Abstract

This paper examines peer effects on the corporate cash holdings of manufacturing firms in the U.S. market. Responding to possible preemptive moves by rivals using their cash holdings, we hypothesize that managers consider their rivals' cash levels when determining their own cash holdings. The results show that the ratio of cash to total assets is significantly influenced by peer firms’ average cash holdings and their characteristics. We also find that firms that have higher R&D expenditures are more inclined to mimic the cash holdings of their rivals. We conclude that the peer effect is an important determinant of corporate cash policies in U.S. manufacturing firms.