Abstract
Corporate governance and the availability of external financing can be important determinants of corporate cash holdings. In this research, in line with Opler et al. (1999), the authors find that Korean firms’ cash holdings are affected by firm-level characteristics including firm size, leverage, market to book, cash flow ratio, net working capital, and cash flow volatility in addition to corporate governance. Rather than agency-prone, the authors can ascribe the increase in cash holdings to the precautionary corporate demand for cash (Campbell et al., 2001). The authors also report that operating risks stemming from cash flow volatility, unavailability of external finance, credit rating downgrades, etc., may be associated with precautionary corporate demand for cash. Lastly, it is documented that corporate governance proxied for by block and/or insider ownership stakes is inversely associated with corporate cash holdings. Keywords: demand for money, corporate governance, corporate cash holding. JEL Classification: G39, E41, G34
Highlights
Cash holding motivesThe literature has identified the following reasons of corporate demand for cash: transaction, precautionary, and agency motives
This research is motivated by the recent literature (Bates et al, 2009; Dittmar et al, 2003; Hartford et al, 2008) that discusses the determinant of corporate demand for cash
We find that operating risks stemming from cash flow volatility, unavailability of external finance, credit rating downgrades, etc. may be associated with corporate demand for cash whose motive is supported by the precautionary demand theory
Summary
The literature has identified the following reasons of corporate demand for cash: transaction, precautionary, and agency motives. This can be seen as such that the older firms which committed to dividend payments cannot flexibly build up cash even in the anticipation of operating risk. It appears that the firms with lower credit ratings show higher cash holdings, which is consistent with the expectation that firms with higher costs of external financing tend to hold more cash. The cash holding ratio is defined as cash and marketable securities divided by total assets
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