Cash Hoarding Research Articles

Empowered minority shareholders and corporate cash dynamics: Empirical evidence from China's online voting reform

This study examines whether enhanced minority shareholder voting influences corporate liquidity management. Using China's Rules for the Implementation of Online Voting (Rules) as a natural experiment, we find that increased minority shareholder participation leads to a significant reduction in corporate cash hoarding. By enabling their active participation, the Rules curtails tunneling activities, especially in firms with excess cash reserves, thereby mitigating expropriation by controlling shareholders. This effect is notably stronger in firms with weaker external monitoring mechanisms. Our findings also reveal that empowered minority shareholders contribute to more efficient cash allocation, reflected in higher market valuations of cash holdings and a quicker adjustment toward optimal cash levels. Overall, this study highlights the economic benefits of strengthened minority voting rights in mitigating agency problems and promoting value-enhancing liquidity management strategies.

Board Composition and Cash Hoarding: Evidence from Jordanian Small- and Medium-Sized Enterprises

This study examines the influence of board composition on cash hoarding in Jordan. Based on a sample of 24 small and medium-sized enterprises (SMEs) between 2010 and 2020, the results show that board size has a positive impact on cash hoarding, whereas board independence has a significant negative influence on cash hoarding. Importantly, we note that cash hoarding is not affected by either chief executive officer (CEO) duality or female directors, contradicting the idea that women are risk-averse when making financing decisions. Regarding the other explanatory variables, the results reveal that firm size and operational risk have a significant and negative effect on cash hoarding, whereas growth opportunities have a positive and significant impact on cash hoarding. Finally, cash hoarding is not affected by cash flows. The results remain robust after addressing the endogeneity problem, and they enrich the literature with new evidence of the influence of female directors on cash hoarding in Jordan, where female board representation is low. Furthermore, the results provide evidence of the role of CEO duality on boards of directors, an issue that regulatory bodies in Jordan should consider when planning future governance reforms. Subjects: Quantitative finance, corporate finance, business, management, and accounting.
 
 Received: 9 July 2023 / Accepted: 18 November 2023 / Published: 5 January 2024

Liquidity buffers and open-end investment funds: Containing outflows or reducing fire sales?

Using a sample of open-end corporate bond funds domiciled in the euro area, we exploit the COVID-19 market turmoil in March 2020 to examine two channels through which liquidity buffers can reduce procyclicality in the investment fund sector. First, we find no evidence that liquidity buffers reduced outflows during the peak of the COVID-19 crisis. Second, we find that funds entering the crisis with higher liquidity buffers were less likely to involve in cash hoarding and more likely to use cash buffers to meet outflows. Our results suggest that higher liquidity buffers can reduce procyclicality primarily through supporting the liquidity management strategies employed by fund managers.

The effects of the BoJ's ETF purchases on equities and corporate investment

The Bank of Japan acquired ETFs and stocks to stimulate Japan's stagnating economy and improve financial conditions. Studies found that this program raised equity prices, although its effectiveness in stimulating corporate investment remained unclear. This paper contributes to the literature by identifying the program's channels affecting equities and corporate investment by utilizing data from firms listed on the Nikkei-225 from 2012 to 2019 and estimating a panel GMM. The results show the program raised stock returns and reduced volatility by creating price pressures and inducing investors to rebalance their portfolios; however, it diminished market liquidity by reducing the supply of shares and adjusting market expectations. The program raised investment for firms with high-growth prospects or domestic-oriented revenue by increasing household wealth and reducing equity risk premia to create favorable financial conditions. Overall, this study illustrates the program stimulated investment while having trade-offs regarding market liquidity and cash hoarding.

Monetary Policy and Commercial Banks’ Credit to Agricultural Sector: A Study of Nigeria

This study examines the relationship between monetary policy and commercial banks credit to agricultural sector in Nigeria with uses of secondary data for the period 1981 to 2021 by applying Autoregressive Distributed Lag technique. Result from this study shown that, liquidity ratio, monetary policy rate, loan to deposit ratio and cash reserve ratio have no significant influence on commercial banks credit to agricultural sector in Nigeria. On the other hand the treasury bill ratios has significant positive effect on commercial banks credit allocated to agricultural sector in Nigeria. The study therefore recommends that Central Bank of Nigeria should cuts down the cash reserve ratio to encourage the loanable funds available with the banks. Regulatory authority should put in place suitable policy that will prevailing cash hoarding in the economy to achieve desired liquidity ratio level. CBN should use the loan to deposit to center for regulating and moderating commercial banks for a positive significant impact to sectors in Nigeria. Authorities should use monetary policy rate to expand the volume of commercial banks’ ability to grant credits. Finally, monetary policy authority should ensure that holding of treasury bills by commercial banks should be reduced to enhance the ability to grant loans and advances to the public for productive purposes. .

International takeover laws and corporate cash holdings

AbstractWe examine the impact on corporate cash holdings of international merger and acquisition (M&A) laws, which facilitate corporate takeovers. We use the staggered enactment of M&A laws from 1992 to 2005 and a sample spanning 34 jurisdictions, and find that levels of corporate cash holdings increase after passage of M&A laws. We also find that firms with better operating performance, higher earnings volatility, higher P/E ratio, and in jurisdictions with high M&A intensity hoard more cash after the enactment of M&A laws. These firms decrease dividends and capital expenditure and increase cash‐based acquisitions in the post‐M&A law period. Additional analysis shows that the effect is manifested in the subsample of firms in jurisdictions with better institutional environments. Lastly, we find that investor valuations of cash holdings decrease after the enactment of M&A laws. Collectively, our results suggest that managers hoard cash to finance M&A activities after the enactment of M&A laws, driven by the motive of empire‐building, and that cash hoarding behaviors are viewed by investors as value‐decreasing.

Banks During the Pandemic: A Japanese Perspective

In recent years, Japanese banks have revived their leading international role in the provision of global liquidity. Since the start of the pandemic of COVID-19, Japanese banks have increased their overseas lending at a much higher pace. This article looks at the activities of Japanese banks, and the drivers behind such a surge by considering factors that characterize the domestic economy. It is argued that uncertainties associated with COVID-19, and government response by means of introducing numerous unconventional measures to counter adverse effects of the pandemic, have increased cash hoarding in the economy. Japanese banks have seen a surge in the deposits held, as well as a decline in loans. Data from the Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks reveals that the demand for loans from all size firms and households has declined since mid-2020. Faced with ongoing razor-thin margins and prolonged low interest rates at home, Japanese banks have continued their overseas activities in a search for yield; and they have increased their exposure to offshore financial centers which could have potential domestic financial stability implications.

Cash economy, criminality and cash regulation in Ethiopia

PurposeThis paper aims to examine the contribution of Ethiopia’s cash economy to financial crimes. It also investigates the regulation of cash in the context of controlling crime stemming from the cash economy.Design/methodology/approachThis study relies on primary data generated from 20 interviewees drawn from the National Bank of Ethiopia, Ethiopian Financial Intelligence Center, selected commercial banks and law enforcement agencies and document review from government reports, media press and statutes, as well as secondary data from online and offline sources.FindingsThe cash-intensive nature of Ethiopia’s economy has enabled a significant amount of cash to circulate outside of the formal financial system. This money is partly to blame for the prevalence of criminal activities such as cash hoarding, corruption and illicit financial flows. To address the threat of crime posed by the cash economy, the Ethiopian Government has taken measures such as restricting cash withdrawals from financial institutions, limiting the amount of cash individuals can hold and demonetizing the banknotes. The measures enable the banks to collect the cash circulating outside of the formal financial sector. However, the effect of these measures on reducing future criminality remains uncertain. Improving the financial inclusivity of the country, specifically expanding basic financial products to the rural areas, digitalizing the country’s payment system, raising general financial awareness and establishing a strong financial consumer protection framework would play a critical role in reducing future criminality and transforming the cash-intensive into a cashless economy.Originality/valueThis paper provides a first-of-its-kind analytical perspective on the contribution of Ethiopia’s cash economy to criminal activity and the adequacy of countermeasures so far taken.

Liquidity Management Practices of Small and Medium-Scale Enterprises in Lagos State, Nigeria

The study investigated the extent of liquidity management practices among Small and Medium-Scale Enterprises in Lagos State, Nigeria. The study made use of primary data and the population of the study comprised of 4,460 registered Small and Medium-Scale Enterprises in Lagos State based on the Nigerian government contacts database (2015). Using Taro Yamane’s formula, a sample size of 367 Small and Medium-Scale Enterprises was computed for questionnaire administration. In each Small and Medium Enterprises that was randomly sampled, questionnaires were administered to the respondents; Owner, Supervisor or Financial Manager who provided the necessary information on liquidity management practices of their firms. Data collected from the study were analysed with the use of appropriate descriptive statistics. The result of the study revealed that SMEs engaged in liquidity management practices such as cash budget (97%), bank account operation (77%), investment in current assets (67%), and making current assets available for immediate conversion into cash (71%). Use of mechanisms in the realisation of sundry debtors (64%) and collection of debts due (64%). The study, therefore, recommended that regulatory authorities should put in place an appropriate policy with compliance measures to check high volume cash transactions and cash hoarding prevalent in the economy.

Crypto asset ownership, financial literacy, and investment experience

ABSTRACT This study compares the key characteristics of Japanese crypto asset owners with those of nonowners. After confirming that average crypto asset owners are likely to be young and male as compared to average crypto asset nonowners, we find that average crypto asset owners tend to have a higher level of financial literacy and are more likely to use cashless payment methods and hoard cash, as compared to average crypto asset nonowners. This study also determined novel heterogeneities among crypto asset owners according to their investment experience with conventional risky financial assets in terms of cash hoarding and financial literacy. Crypto asset owners without investment experience with conventional risky financial assets do not hoard cash and their level of financial literacy is lower than that of both crypto asset owners and nonowners with investment experience with conventional risky financial assets. The results suggest that financial regulators should not treat crypto asset owners as a homogenous group of financially literate investors who are inherently good at internet transactions.

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

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.

Flight‐to‐safety and the credit crunch: a new history of the banking crises in France during the Great Depression†

AbstractDespite France's importance in the interwar world economy, the scale of the French banking crises of 1930–1 and their consequences have never been fully assessed quantitatively. The lack of banking regulation severely limited the availability of balance sheet data. Using a new dataset of individual balance sheets from more than 300 banks, this article shows that the crises were much more severe than previously thought, although they did not affect the main commercial banks. By reconstructing financial flows, this study shows that the fall in bank credit was mostly driven by a flight‐to‐safety by deposits, from banks to savings institutions and the central bank. The decrease in bank deposits due to bank runs was offset by an increase in deposits with savings institutions, with the central bank, and in cash hoarding, whereas the decrease in bank credit was not offset by an increase in loans from non‐bank financial institutions. In line with the gold standard mentality, cash deposited with savings institutions and the central bank was used to decrease marketable public debt and increase gold reserves, rather than pursuing countercyclical policies. Despite massive capital inflows and rising aggregate money supply, France suffered from a severe, persistent credit crunch.

Corporate social responsibility and provision of trade credit

In this article, we identify and examine three different views of corporate social responsibility (CSR) and the relationship between CSR and firms’ provision of trade credit. The trust view of CSR argues that CSR and trade credit provision are related positively, because CSR, as a trust-enhancing device, complements the incomplete contract nature of trade credit. The CSR literature shows that CSR firms tend to have higher cash holdings. With this in mind, the precautionary motive view of CSR suggests that cash holdings serve as a hedge against trade credit risk, while, on the other hand, the substitution view of CSR predicts that cash hoarding discourages the provision of trade credit. Using a dataset of 20,591 firm-year observations from 1991 to 2015, we find strong evidence that supports both the trust and substitution views of CSR but not the precautionary view of CSR.

Corporate cash hoarding and corporate governance mechanisms: evidence from Borsa Istanbul

ABSTRACT Hoarding cash can create conflicts of interest between managers and shareholders that lead to an agency conflict. Corporate governance is a mechanism to overcome agency conflicts. Thus, this study aims to examine the effect of corporate governance mechanisms on the corporate decision to hoard cash. The study focuses on the BIST100 nonfinancial firms listed on the Borsa Istanbul during the period from 2010 to 2014. It finds that firms with smaller boards of directors and larger audit committees are likely to hoard less cash. However, firms with a large percentage of independent directors are likely to hoard more cash. This study also finds that when the CEO of a firm acts as the chairman of the board, the firm tends to hoard more cash. Further, the study finds that firms audited by a big auditor are more likely to hoard less cash than firms audited by a non-big auditor. These results suggest that firms with good corporate governance mechanisms (except for the percentage of independent directors) are likely to hoard less cash to reduce agency conflicts.

Cash Usage Trends in Japan: Evidence Using Aggregate and Household Survey Data

We examine the trends in cash usage in Japan and its substitution with noncash payment methods, such as credit cards and electronic money, using both aggregate and individual household survey data. We find that cash hoarding accounts for as much as 42% of total cash circulation in Japan. Behind this finding lies an unstable semi-log cash demand function after the late 1990s and a stable log-log cash demand function from 1995 to 2016. We also find that the extent of possible decreases in cash demand because of the substitution of cash for credit cards in day-to-day transactions is not large. Our back-of-the-envelope estimate of the possible maximum decrease in cash demand for day-to-day transactions is at most 0.4% in 2017 of the total cash in circulation in Japan.

Precautionary replenishment in financially-constrained inventory systems subject to credit rollover risk and supply disruption

We consider a limited-liability firm that owns a finite single-product inventory subject to periodic-review replenishment and a corporate treasury that mediates the firm’s financial transactions related to inventory operations. The firm may elect to borrow money to purchase product via a revolving line of credit, secured by a compensating balance which determines the credit limit. The line of credit is subject to rollover risk, namely, each period the funding entity may, with some probability, refuse to roll over the line of credit. In response, the firm can search for an alternate funding entity, but in so doing it may incur search costs, primarily in the form of lost sales. The firm optimizes inventory replenishment order sizes and decides whether it should declare bankruptcy, as function of its inventory and available capital. The recent credit crunch has rendered illiquidity a critical concern for funding and operating decisions in enterprises. This paper addresses optimal inventory management in the face of liquidity shocks and supply disruptions. We show that rollover risk and supply disruption are important considerations for firms that rely on external funding. Rollover risk alone results in optimal inventory replenishment policies that differ materially from those specified by traditional supply chain models; differences manifest as state-dependent precautionary replenishment or cash hoarding. Inventory management models which fail to take rollover risk and supply disruption risk into account can prescribe suboptimal replenishment policies. Such policies would generate suboptimal profits for firms that rely on short-term financing to fund their working capital.

Fighting Tax Evasion by Discouraging the Use of Cash?

AbstractWe propose a bargaining model of tax evasion with a seller that offers a price discount to a buyer in exchange for a cash payment without a receipt, which allows tax evasion. We study the effect on evasion and government revenue of two policy instruments: a tax on cash withdrawals (TCW), which imposes a cost on the buyers who pay cash, and a tax rebate conditional on having the receipt. The tax rebate reduces evasion but it is costly if tax evasion is low. The TCW reduces evasion only if it is set at a sufficiently high rate, which must be higher the larger is the mass of cash users. We also show that the implementation of a TCW, which poses several challenges, is easier if the cost of cash hoarding is high.

Lower bound on interest rates and ways to overcome it

Expansionary monetary policy was traditionally thought to be restricted by the zero lower bound on nominal interest rates. Yet since 2014, some central banks, facing secular stagnation and deflationary traps, have pushed key policy rates below zero. This paper reviews the theoretical literature on the zero lower bound and proposals to overcome it. It concludes that such proposals are primarily designed to discourage cash hoarding, and their success depends on the economic and cultural environment in which they are to be implemented.

Cash hoarding: Vice or virtue

A neo classical model is proposed to highlight the firm’s endogenous allocation decision over the liquid asset versus capital asset to the extent of firm size and liquidity shortage. Liquidity shock has a long lasting vestige on the firm’s cash holding policy in the aftermath of Great recession. We conduct difference in difference regression to test the effect of firm size and the severity of economic crisis on the cash hoarding. Encompassing 85,559 firm-years from the eight countries spanning from 2002 to 2015, we find precautionary demand prevails among the small firms while transaction cost concern matters for large firms a posteriori 2008 as postulated in the proposed model. As the declining capital asset return entails liquidity hoarding, unilateral governmental sanction against the cash-hoarding may exacerbate investment among the small firms.

Corporate Cash Hoarding: The Role of Just-in-Time Adoption

I explore the role of the just-in-time (JIT) inventory system in the increase in cash holdings by U.S. manufacturing firms. I develop a model to illustrate the mechanism through which JIT affects cash and quantify its impact. In the model, both cash and inventory can serve as working capital. As firms switch from the traditional system to JIT, they shift resources from inventory to cash to facilitate transactions with suppliers. On average, this switchover accounts for a 4.1-percentage-point increase in the cash-to-assets ratio, which is approximately 28% of the change observed in the data. Data are available at https://doi.org/10.1287/mnsc.2017.2775 . This paper was accepted by Neng Wang, finance.