The effects of decarbonization on corporate cash holdings

Corporate cash induces the opportunistic behavior of corporate managers that can create an agency problem. A corporate governance system controls the opportunistic behavior of managers and can affect the firm's policy on holding cash. This study explains how the aspects of corporate governance, country-level and firm-level governance, can affect the corporate policy on holding cash. First, the study provides the nature, definition, and importance of corporate cash holdings. Second, it outlines various motivations and theories behind holding corporate cash. Third, it explains the relation between firm-level governance and corporate cash holdings. Fourth, it focuses on the impact of firm-specific governance attributes on the level of corporate cash holdings. Fifth, it presents the relation between country-level governance and corporate cash holdings.

The present study analyses influence of board structure and cash holdings on the value of Australian firms for the period 2004 to 2010. Australian Stock Exchange (ASX) adopted the Principles of Good Corporate Governance Guidelines in 2003 and Australian firms have started adopting these principles starting 2004. Similarly the reporting framework of Australian firms is harmonized with the rest of the world with adoption of Australian International Financial Reporting Standards (AIFRS) starting in 2004. Corporate cash holdings despite their significance have not been considered extensively in prior literature outside the US. Cash holdings may have significant influence on the value of the firm as too much excess cash may lead to misuse of these funds by entrenched managers. Corporate governance has a role to play in maintaining appropriate cash holdings and their use. The present has two objectives: it considers the influence of corporate cash holdings on the value of Australian firms; and it examines the role of board structure on the relationship between cash holdings and value of the firm. The present study considers all non-financial firms that are part of the All Ordinaries Index (AOI). The present study constructs Fama French 25 portfolio and estimate the excess return as the difference between actual return and the average return of the relevant FF portfolio. OLS analyses show that board independence has no significant impact on the value of the firm though cash holdings have significant influence. Analysing using panel data methods however unearth the significant influence of board independence on the value of Australian firms.

Indian corporations were holding considerable amounts of cash and cash equivalents (CCE). Extant literature suggests that agency conflicts and financing frictions are important determinants of corporate cash holdings. This study examines the relation between cash holding and the quality of firm-level corporate governance (CG). We use 24 structural indicators of CG relating to ownership, board and boards committees, audit considerations, and leverage characteristics along with a specific set of control variables. Four different measures of corporate cash holdings and liquidity have been employed. We begin with an exploratory inquiry into the dimensions of CG using principal component analysis and then use regression to delve into the association between cash holding and CG. Our evidence suggests that the quality of firm-level CG has important implications in deciding corporate cash holdings.

Determining optimal cash holding is one of the most crucial issues in the corporate financial management aiming to maximise the shareholder value. The optimum of corporate cash amount is not only dependent on many company-specific factors, but it is also associated with both the corporate governance structure and the institutional and macroeconomic environment. Earlier research papers showed that at the macro level, companies adjust their cash holdings to the changes in the level of the inflation and, at the micro level, to the changes of the operating cycle linked to the turnover of the corporate cash flow.
 This paper investigates the determinants of corporate cash holdings for a sample of 868 firms from ten South-East European countries (Bosnia and Herzegovina, Bulgaria, Montenegro, Croatia, Greece, Romania, Macedonia, Slovenia, Serbia and Turkey). More specifically, we investigate the influence of the inflation and the corporate operating cycle on the corporate cash holdings. Using company financial data and the country CPI for the period 2006-2015, we apply a balanced panel regression model involving the yearly change of the cash ratio as a dependent variable, and country CPI, operating cycle and other firm-specific control variables as explanatory variables.
 Results confirm that both the inflation rate and the operating cycle have substantial influence on the change of the corporate cash holdings also in the region. The relationship of the change in cash and the inflation is non-linear and best described by a U-shaped curve. That means that corporate cash holdings decrease as the level of inflation increases to a critical point but beyond that, the cash holdings start to increase. At the same time, we identified a straight linear relationship between the change in cash holdings and the length of the operating cycle. Also, we found that the change in the corporate cash holdings is positively related to the size of the company, the operating cash flow and the capital expenditures. In addition, it is inversely associated with both the change of the net working capital and the change of short and long-term debt.

PurposeThis study aims to investigate the impact of ownership by large shareholders (blockholders) on corporate cash holdings. The study further investigates heterogeneity in the relationship between blockholder ownership and corporate cash holdings.Design/methodology/approachBuilding on the precautionary and agency motives of corporate cash holdings, the study focuses on publicly listed firms from 22 European countries for the period from 2006 to 2015. Multiple pooled ordinary least square and fixed effects regression models are employed to examine the relationship between blockholder ownership and firms’ cash holdings.FindingsThis study documents a positive relationship between blockholder ownership and corporate cash holdings which indicates the role of blockholders in influencing firms’ cash holdings policies. However, further analyses show that the effect of blockholding on cash holdings depends on the type of blockholder. While the relationship is still positive between cash holdings and ownership by strategic blockholders, it turns negative for the ownership by institutional blockholders.Research limitations/implicationsThis study provides evidence for the important role played by firms’ ownership structures, and especially blockholding, in shaping firms’ cash holdings decisions. The findings are therefore of great value for investors, firms’ management and board and policy makers.Originality/valueThis paper contributes to the literature by providing an explanation of the contradictory results documented in the literature on the impact of blockholders on corporate cash holdings. This study, to the best of the author’s knowledge, is the first to examine the effect of blockholder ownership on cash holdings by distinguishing between different types of blockholder.

The resource-based view theory suggests that as firms’ resource bases differ along the corporate life cycle, even corporate policies such as cash holdings vary along the life cycle. This study seeks to understand the effect of firm’s life cycle on corporate cash holding behavior. Previous literature has sought to investigate the firm and institutional determinants of corporate cash holdings. Using the resource-based view theory, this study investigates whether corporate life cycle can be another determinant of corporate cash holdings. A panel data analysis of a sample of 112 Johannesburg Stock Exchange (JSE) listed firms from 2011 to 2018 is utilized to determine if firm’s life cycle does influence cash holding behavior. Dickinson’s cash flow analysis is used to proxy life cycle stages and control other known determinants of corporate cash holdings such as firm size, leverage, profitability, dividend payments, and growth opportunities. Contrary to other studies, this study finds no significant relationship between life cycle stages and corporate cash holdings, suggesting that corporate cash holdings for South African firms are driven by other factors other than life cycle resource allocations. However, it is found that prior year cash balances, firm size, and profitability have significant positive relationships with cash holdings. It is also found that liquid asset substitutes, leverage, and investment opportunities exert a significant and negative influence on corporate cash holdings.

The purpose of this study is to investigate the effect of firm structure (whether diversified or focused firms) on corporate cash holding. Samples of 80 non-financial companies were selected including diversified and focused firms which were listed on Karachi stock exchange for a period 7 years from 2006 to 2013. These diversified and focused firms were selected on the basis of equal proportionate method. Random effect model and descriptive statistics were used for the analysis of these variables. The results of these models showed that there is negative and significant effect of firm structure on corporate cash holding. We also find negative and significant relationship of leverage and Networking capital with the corporate cash holdings and the relation between growth opportunities and corporate cash holding was examined to be positive and significant. We also find a negative and insignificant relationship between firm size and corporate cash holding. The descriptive statistics showed that there was significant difference between the cash holding of diversified and focused firms. The diversified firms keep a smaller amount of cash as compare to the single segment companies (focused firms), which is in support of the trade-off theory. This paper contributes to current literatures with regard to organization structure (whether diversified or focused firms) on cash holding in a developing economy like Pakistan.

PurposeThe purpose of this paper is to examine the impact of corporate environmental responsibility (CER) on corporate cash holdings. This paper also investigates the moderating effects of ownership type and institutional environment between CER and corporate cash holdings.Design/methodology/approachThis study uses the data of the most polluting listed companies on the Shanghai and Shenzhen stock exchange markets over the period 2010–2019. CER data from Hexun.com (a professional CSR evaluation system) are used to measure CER performance. Two proxies are used to measure the level of cash holdings simultaneously, where CASH1 is calculated as the ratio of cash and cash equivalents to total assets, and CASH2 is calculated as the ratio of cash and cash equivalents to net assets (total assets minus cash and cash equivalents). Finally, multiple regression analysis is applied to test the research hypotheses.FindingsThe results show that environmentally responsible companies hold substantially less cash, and the result is statistically significant and robust even after using firm fixed effects and applying alternative measures of cash holdings or alleviating potential endogeneity. In addition, the results of cross-sectional tests show that the negative relation between CER and corporate cash holdings is concentrated among non-state-owned enterprises, and firms in provinces with more developed institutions. Furthermore, the result of the analysis of the economic consequence shows CER significantly increases the value of cash holdings.Research limitations/implicationsThis study focuses on China's institutional context, which limits the generalizability of the findings to other countries. However, the objective of this research can be studied in other institutional settings, so the above limitations provide a springboard for further research. Furthermore, the environmental protection investment, green technology innovation, and even pollutant discharge of companies can also be important indicators to measure the performance of firms in fulfilling their environmental responsibilities, which can be considered in future research.Practical implicationsThe findings of this study may help company management in China to establish a correct view of environmental responsibility to achieve corporate value creation and corporate sustainability. And our research can also provide the policy reference value for the Chinese government to further improve environmental protection policies and systems, guide enterprises to conduct green production to realize the country's vision of an environmentally friendly society.Originality/valueBased on the current background that countries in the world advocate the development of a green economy, this is the first study to examine the impacts of the environmental responsibility of the most polluting companies on corporate cash holdings and the value of cash holdings in the context of China, an emerging market.

This study investigates the changes in national culture, economic uncertainty, and their joint effects on corporate cash holdings across 58 countries over the period 2004 to 2020. The study also delves into the importance of national culture in amplifying the impact of economic uncertainty in influencing corporate cash holdings. Drawing on three national cultural dimensions, trust-distrust, collectivism-individualism, and duty-joy orientation-based on the European Value Survey (EVS) and World Value Survey (WVS), we employ a panel data model with a fixed effect approach and incorporate the lag of the independent variable to mitigate potential endogeneity issues. Our findings show that transitions in national culture from collectivism to individualism do not significantly decrease corporate cash holdings. Moreover, a cultural shift from distrust to trust does not result in a decrease in corporate cash holdings. Conversely, a move towards a short-term orientation motivates firms to reduce their cash holdings. The interaction between economic uncertainty and collectivism and individualism tends to increase corporate cash holdings. However, there is no difference in the impacts of the three cultural dimensions for financially constrained and unconstrained firms on corporate cash holdings. This study offers significant practical implications, particularly for policymakers in countries where they have strong collectivistic national culture, which may amplify the effects of economic uncertainty.

This study evaluates the relationship between state ownership and corporate cash holdings by taking into account the role of the business environment in the context of an emerging economy. Both linear and non-linear models are employed for listed enterprises’ financial data during the period from 2011 to 2019 in Vietnam. The empirical results show that state ownership reduces the corporate cash holdings in the linear model, and there is a U-shaped relation between corporate cash holdings and state ownership in a non-linear manner. By using the extended models, this study obtains consistent evidence to show that corporates reduce their cash holdings when the business environment becomes better and vice versa. Specifically, we find that the speed of cash adjustment in Vietnam is smaller than that in the developed countries, implying that corporates can shelter their liquid assets in order to avoid the negative effects stemming from agency problems between managers and state-shareholders. However, they are willing to hold more cash because of the mitigated agency problems in the case of the dominant state ownership. Ultimately, the business environment’s quality will have more power in determining the behaviour of corporates’ cash holding to meet market risks than state ownership. This study contributes to financial literature by determining the business environment’s critical role in the relationship between state ownership and corporate cash holdings.

In the context of imperfect markets, it is important to understand the relationship between nonearning assets and firm value, in order to evaluate the corporate financial policies and to attain the right equilibrium between liquidity and profitability. The aim of our paper is to assess the relationship between corporate cash holdings and firm value for a sample of 719 Polish listed firms over the period 2007-2016. The study reports an inverted U-shape relationship between cash holdings and firm value, irrespective of whether we use static regression methods or dynamic panel regression. Our results confirm the existence of an optimum level of cash holdings at 27.06% of total assets. Furthermore, the nonlinear relationship between firm value and corporate cash holdings is found for all Polish listed firms, financially and less financially constrained. We report two breakpoints of the cash-value relationship, in the context of financial constraints, and the results indicate that the optimum level of cash holdings is much higher for financially constrained firms than less financially constrained ones. Finally, we show that the financial crisis has no additional impact on the nonlinear relationship between cash holdings and firm value. We validate the financial constraints as having a more pronounced effect on the relationship between corporate cash holdings and firm value, compared to the financial crisis, as intervening effects, in the context of the Polish economy. This study holds important microeconomics policy implications – firm-level financial policies should evaluate the tradeoff between cash holdings and market value in order to maintain the firm financial performance.

Based on climate change data of local cities and cash holding data of Chinese listed companies from 2011 to 2019, this article studies the impact of climate change on the level of corporate cash holdings and analyzes the path of climate change on the corporate cash holding level. The results show that under the influence of climate change, enterprises hold a high level of cash holdings to cope with risks and change variables to carry out robustness tests; meanwhile, the results remain consistent. By analyzing the source channels of enterprise cash, it is found that climate change increases the cash received from selling goods, providing services, and tax refund, but decreases the cash received from borrowing. The mechanism of action shows that climate change has increased the operating risk of enterprises and thus the level of cash holdings of enterprises, but climate change has not increased the financial risk of enterprises. The main reason is that under the influence of climate change, enterprises have reduced the debt level and thus reduced the financial risk. Heterogeneity analysis shows that the impact of climate change on corporate cash holdings is more obvious in state-owned enterprises, enterprises with high degree of financing constraints, and ecologically fragile regions. This study provides a new explanation for the influencing factors and approaches of corporate cash management strategies, which helps to better understand the cash holding strategies of listed companies in China. It also indicates that climate change is likely to be a macro incentive to aggravate the risks of real economy.

We empirically test the risk-reduction hypothesis of the agency theory in the context of corporate cash holdings. Since corporate cash holdings can be viewed as risk-free investments, the risk-reduction hypothesis predicts that a risk-averse and self-interested CEO allocates more firm assets to corporate cash holdings to reduce firm risk at the expense of giving up some positive NPV but risky projects, which is not beneficial to shareholders. We use the sensitivity of the value of a CEO's stock options to stock return volatility (Executive Stock Options risk incentives) to study the relation between a CEO's risk incentives and corporate cash holdings. We find that firms with lower ESO risk incentives have more corporate cash holdings. We find that more corporate cash holdings reduce firm risk, and that corporate cash holdings have a negative marginal impact on firm value due to the risk-related agency problem. These findings are consistent with the risk-reduction hypothesis of the agency theory in the context of corporate cash holdings.

This study examines the impact of the shariah complaint status on corporate cash holdings, the speed of adjustment towards its target cash holdings, and the effect of firm-specific factors on corporate cash holdings. The data of non-financial firms listed on the Pakistan Stock Exchange from 2015 to 2020 has been collected. The panel data methodology is used. The findings imply that shariah-compliant firms hold more cash than non-shariah-compliant firms. The adjustment speed toward its target cash holdings is faster in shariah compliant firms. The financial leverage and cash flows show a negatively significant effect on corporate cash holdings. The working capital, dividend, and profitability exert a significant positive change on cash holdings. Explaining the cash-holding determinants reveals that trade-off and pecking order theories play a central role. This study is beneficial for policymakers, managers, and investors.

PurposeThis study aims to examine the effect of corporate cash holdings on financial performance. Additionally, it investigates the moderating effect of corporate governance and family ownership on the link between corporate cash holdings and financial performance.Design/methodology/approachThis study uses secondary data regarding the sample of 81 firms listed in the Karachi Stock Exchange (KSE) 100 index from 2011 to 2020. The present study applies the system generalized method of moments (GMM) to estimate the dynamic financial performance models.FindingsThe findings reveal that corporate cash holding is significantly positively linked with financial performance. Further, the findings indicate that the board size and chief executive officer (CEO) duality strengthen the association between cash holdings and financial performance, whereas CEO gender and family ownership weaken the positive effect of cash holdings on financial performance. Furthermore, the findings suggest that Covid-19 significantly negatively affected the financial performance of Pakistani firms.Practical implicationsThe findings have several policy implications. First, policymakers need to increase the board of directors' role in observing the firms' cash-holding behaviour. Policymakers may also formulate policies providing stronger protection for minority shareholders from majority shareholders.Originality/valueTo the best of the authors' knowledge, this study is the first to examine how corporate governance and family ownership influence the link between corporate cash holdings and financial performance in the context of Pakistan.