Firm Cash Research Articles

Uncertainty avoidance culture, cash holdings and financial crisis

PurposeThis paper aims to investigate how the global financial crisis affects the relationship between uncertainty avoidance culture and corporate cash holdings.Design/methodology/approachThis study develops a research model in which cash holdings ratio is a function of post-crisis period dummy, Hofstede’s cultural dimension of uncertainty avoidance, their interactive term and control variables. The research sample includes 188,264 observations from 26,509 firms incorporated in 44 countries between 2003 and 2016.FindingsThis study finds that the effect of uncertainty avoidance culture on firm cash holdings is stronger in the post-crisis period from 2008 to 2016. This effect is stronger for financially constrained firms. In addition, the research findings show that uncertainty avoidance culture is more effective in cash–cash flow sensitivity over the post-crisis period.Originality/valuePrior studies show that uncertainty avoidance culture positively affects corporate cash reserves. However, the authors only examine the effect of uncertainty avoidance culture on cash holdings in a static environment. This paper investigates this effect under the impact of the global financial crisis – an exogenous shock.

Predation risk, market power and cash policy

PurposeThe purpose of the present study is to discuss the combined effect of predation risk and firms' market power on cash holdings.Design/methodology/approachThe authors tested hypotheses by using consolidated financial data in Japanese firms.FindingsThe authors find that firms' cash holdings increase with a rise in predation risk faced by firms. However, the higher the firm's market power, the weaker the above interplay becomes. Moreover, the authors find that even when firms' investments are decreased at the industry level, firms with larger cash holdings seek to mitigate predation risk by funding strategic investments with the potential to steal rivals' market share.Originality/valueThe authors recognize the importance of a firm's market power. Take a firm's market power into consideration to analyze the mechanism of a firm's cash holdings, there is a possibility that the mechanism of a firm's cash holdings as presented by the previous studies will be changed.

Corporate social responsibility and cash flow volatility: The curvilinear moderation of marketing capability

CSR’s beneficial roles on firm financial performance have been well documented. However, the relationships existing in the literature are largely assumed to be linear. In this research, we propose a U-shaped relationship between CSR and firm cash flow volatility to demonstrate CSR’s dynamic implication on the performance instability and therefore extend the understanding of CSR into a new area involving firm performance risk factors. Further, we incorporate another key firm characteristic, marketing capability, to formulate the interactive associations between CSR and firm market-side ability toward better risk management. The results show that CSR may reduce firm cash flow volatility at low and moderate levels but will increase the volatility when the engagement is high. However, a firm with high marketing capability will eliminate the negative impact of CSR.

The impact of CEO educational background on corporate cash holdings and value of excess cash

This study examines the effect of CEOs' educational background on the cash holdings policy and value of excess cash in Korean firms considering the education system in Korea, where academic tracks are determined earlier in life than in other countries. We show that although firms with CEOs who majored in business or in science or engineering have less cash holdings, the value of excess cash holdings varies by major. We find that firms with CEOs who majored in business (science or engineering) show a higher (lower) value of excess cash than other CEOs. Moreover, firms whose CEOs have a master's degree show a higher value of excess cash. In sum, this study suggests that corporate financial policy depends on CEOs' educational background, which determines their personal traits and professional career experience and thus lead to different firm performance in terms of cash holdings policy and the value of excess cash.

Unemployment insurance and cash holdings of privately held firms around the world

AbstractResearch Question/IssueThis paper studies the relationship between country‐level unemployment insurance and cash holdings of privately held firms. When public unemployment insurance is weak, firms may provide alternative unemployment insurance by committing not to lay off workers in bad times. We hypothesize that one way firms can do so is by holding larger cash balances.Research Findings/InsightsUsing a large sample covering 388,940 private firms from 32 countries around the world over the 2007–2014 period, we find a negative relationship between public unemployment insurance and cash holdings. This effect is driven by countries where public unemployment insurance is weak or nonexistent. We also find that privately held firms keep a larger part of their new debt issues as cash when public unemployment insurance is weak.Theoretical/Academic ImplicationsWe contribute to a growing literature on an institution‐based view of comparative corporate governance. We show that national governance factors and, more specifically, public unemployment insurance, which protects employees (an important but relatively ignored stakeholder), influences firm cash holdings in a private firm context.Practitioner/Policy ImplicationsOur findings have important implications for policy design. Specifically, they suggest that labor market institutions designed to support employees can also indirectly benefit their employers because these institutions allow firms to reduce the opportunity cost related to holding larger cash balances.

Disclosure and liquidity management: Evidence from regulation fair disclosure

We examine the effect of the firm’s information environment on its liquidity policy by exploiting a natural experiment involving Regulation Fair Disclosure (Regulation FD). We find, on average, Regulation FD has a negative impact on firm cash holdings. We also directly evaluate changes in firm disclosure policy and find the negative Regulation FD-cash holdings relation is stronger for firms that increased public disclosure and holds largely for firms that faced lower proprietary costs of public disclosure. Furthermore, we find this negative relation is more pronounced for firms with limited access to the credit market. We capture the medium-term effect of Regulation FD two years before and two years after the implementation. Overall, our results suggest that the change in the amount of information disclosed in response to Regulation FD, an externality effect, affects information asymmetry between firms and outside investors and thus cash holdings.

Geographical proximity and value of corporate cash holdings

PurposeIn this paper, the authors examine the association between a firm's geographical location and the value of its cash holdings.Design/methodology/approachFollowing Loughran and Schultz (2005) and Nielsson and Wójcik (2016), the authors define firms as either geographically remote or geographically proximate based on their distance to areas that are either largely populated or concentrated in financial expertise. We also estimate the marginal value of cash using the model developed by Faulkender and Wang (2006).FindingsThe authors find that the marginal value of cash is $0.10–$0.16 lower in remotely located firms than in geographically proximate firms. The lower marginal value of cash is prominent among remotely located firms with greater severity of information asymmetry. Our findings support the view that the inability of shareholders to closely monitor how managers use of firm cash may increase the perceived conflicts of interest associated with managers' cash spending and decrease the value of cash.Originality/valuePrevious studies try to explain the cash holdings puzzle by attributing it to CEO overconfidence, external funding constraints, poor corporate governance, difference in corporate financial policy, poor investor protection, lack of firm diversification and large operating losses. This study contributes to the extant literature by offering new evidence of the role of geographic location on the value of cash holdings.

Precautionary motives for private firms’ cash holdings

In this paper, we focus on the precautionary motive for holding cash in private firms. We check novel implications of such motive that arise under conditions that are typical of private firms. Because of the incomplete separation of the finances of these firms from the finances of the owner, we also complement the traditional precautionary motive with a novel variant that considers stakeholders’ risk attitudes. We find empirical evidence consistent with both versions of the precautionary motive though some of the implications of the traditional precautionary motive, in the form of the hedging motive, are unsupported by the data.

Corporate brand value and cash holdings

This research devotes theoretical and empirical attention to the understudied relationship between corporate brand value and cash holdings. We draw on existing firm valuation theorizing at the marketing–finance interface to propose that branding can alter the probability distribution of the firm’s revenues, lower potential operating shortfalls (negative operating earnings), and thereby reduce the firm’s cash holdings. The negative corporate brand value–cash holdings relationship is empirically tested using Brand Finance’s brand valuation metric as the predictor. Based on a pooled cross-section time-series design of up to 115 firms across 10 years, we find: that (1) support for the predicted negative association between brand value and cash holdings and (2) that the long-term cash holdings elasticity of brand value is between − 0.16 and − 0.22. Interestingly, these results are not replicated when using a traditional consumer-based brand equity measure. This study informs the debate on whether and how brand assets can impact firm cash holdings, reaffirms that results are sensitive to the operationalization of brand assets, and recognizes a new role for brands—as a “downside risk” (not variance) management tool for the top management team. An overarching implication of this research is that brands should be viewed as a firm-wide strategic asset with a sphere of influence that transcends the marketing function.

What Drives Anomaly Returns?

ABSTRACTWe decompose the returns of five well‐known anomalies into cash flow and discount rate news. Common patterns emerge across the five factor portfolios and their mean‐variance efficient (MVE) combination. Whereas discount rate news predominates in market returns, systematic cash flow news drives the returns of anomaly portfolios and their MVE combination with the market portfolio. Anomaly cash flow and discount rate shocks are largely uncorrelated with market cash flow and discount rate shocks and with business cycle fluctuations. These rich empirical patterns restrict the joint dynamics of firm cash flows and the pricing kernel, thereby informing models of stocks' expected returns.

Determinants of Corporate Cash Holdings: An Application of Robust Variable Selection Technique

US firm cash holdings have become increasingly concentrated over time withering shareholder returns and heightening agency problems associated with free cash flows. Our use of a robust regression technique (LAD) and a state-of-the-art variable selection procedure (LASSO) to identify the determinants of US corporate cash holdings, creates a sparse model which is resistant to outliers. We obtain several results. First, the median of absolute errors of the LAD-LASSO-selected variables is significantly lower than the corresponding values of basic determinants in both in-sample and out-of-sample schemes. Second, financial leverage is a key determinant of cash holdings, indicating that cash and debt policies are tightly related. Third, none of the corporate governance proxies are selected by the LAD-LASSO method challenging what we already know from previous studies regarding the role of these mechanisms in corporate cash management. Our findings help shareholders determine to what extent firm cash levels are excessive, help managers determine their cash needs, and help policymakers predict the aggregate corporate cash demand and formulate policy.

The impact of firm specific & macro economic variables on firm growth: A study from Nepal

This paper examines the impact of firm specific and macroeconomic variables on firm growth using panel data analysis of 333 observations from 37 firms for the period of 2003/04 to 2011/12. Sales growth and assets growth are selected as the indicator of firm growth. The result shows that there is a significant negative impact of firm age on sales growth. The result further confirms thatassets growth in the Nepali firm is positively and significantly affected by shareholders’ equity, leverage, firm size and liquidity whereas, negatively affected by firm age and cash flow. Among the macroeconomic variables, GDP growth and money supply have the significant positive impact on sales growth. However, real interest rate has the significant negative impact on sales growth of the firm. Regarding the assets growth, the variable inflation has significant positive impact and real interest rate has significant negative impact on assets growth in the Nepali firms.

CEO facial masculinity and firm financial outcomes

In this paper, we explore relationships between CEO facial width, a proxy for testosterone levels during adolescence, and financial management decisions. Using methodology from prior research, we collect a sample of 968 S&P 500 CEO profiles and analyze them to determine the facial width-to-height ratio (fWHR). We expect that greater CEO facial width will be associated with riskier, more aggressive financial policies. We find that higher CEO facial width-to-height ratio (fWHR) is associated with more aggressive financial management decisions. Specifically, we find a positive relationship between CEO fWHR and firm leverage and a negative relationship between CEO fWHR and firm cash holdings. These relationships are also observed among subsamples where CEOs are likely to wield substantial influence over financial management policies, such as long-tenured CEOs. We do not find evidence that CEO selection process explains the observed relationship between fWHR and financial policies. Thus, it appears that the relationships documented between CEO fWHR and firm financial policies are likely consistent with managerial preference and that high testosterone levels may induce CEOs to pursue aggressive financial policies. We show that high-fWHR CEOs tend to own a smaller fraction of their firms. This suggests an increased priority for more masculine CEOs on pursuing their own best interests (diversification in their personal portfolios) ahead of signaling alignment with shareholders, while the reverse is true for CEOs with lower fWHRs. The results are robust to the inclusion of industry and year fixed effects and firm-year controls. This paper adds to the literature that shows individual differences in CEOs, in this case, CEO masculinity, can predict differences in the financial managerial characteristics of firms and financial policies.

Controlling shareholder share pledging and firm cash dividends

The study examines how share pledging behavior of controlling shareholder affects the corporate payout policy using the unique setting of Chinese market from 2008 to 2015. According to the study result, cash dividend payments for firms with shares pledged by controlling shareholders are significantly decreased relative to those without shares pledged, and the effect is stronger for non-state-owned enterprises (non-SOEs), firms with more related party transactions, and pledged shares with more magnitude, frequencies and maturity. Overall, these findings suggest that induced by the share pledging activity, controlling shareholders can obtain private benefits without considering benefits of outside shareholders.

Corporate Governance and Leverage Implications on Firms’ Profitability, Cash Flows and Value in Nigeria

The paper examines the implications of Corporate Governance and leverage on firm profitability (ROA), value (MPS) and cash flows (FCF). The study utilized the agency, stewardship and free cash flow theories. The correlation research design was employed and data collected from ten (10) listed manufacturing firms in Nigeria between the period 2009-2018. The data was analysed for descriptive and correlation properties, with the research hypotheses tested through regression analysis. The results of the study indicates that independent boards have significant negative influence on debt usage, board size does not have a significant effect on debt capital, CEO duality positively impacts the usage of debt financing. The results also indicate that independent boards (BIND) have significant impact on ROA, FCF and MPS, BSIZE is found to exert no statistically significant impact on the financial performance variables, CEO duality negatively impacts both FCF and MPS of the sampled manufacturing firms in Nigeria. Furthermore, the impact of DEBT on ROA and FCF are found to be negative, with the negative effect on ROA being statistically insignificant at the 0.05 level (-0.015, (0.6846)), and the negative effect on FCF being statistically significant at the 0.05 alpha level. The research concludes that the research therefore upholds that capital structure, corporate governance board characteristics and financial performance of manufacturing firms listed on the NSE are significantly related at the 0.05 level. The study recommended that the role of the CEO and board chairman be separated and current debt levels in the manufacturing industry be maintained. Keywords: Corporate Governance, Leverage, Firm Profitability, Firm Cash Flows, Firm Value DOI : 10.7176/RJFA/10-24-04 Publication date: December 31 st 2019

General Managerial Ability and Corporate Cash Holdings

This article examines whether the general managerial ability of a chief executive officer (CEO) is associated with corporate cash holdings. Integrating the agency and upper echelon theories, we predict that generalist CEOs hold more cash to meet the firm’s obligations or exploit future investment and growth opportunities. To test this conjecture, we incorporate the general managerial ability measure of Custodio et al. (2013) to the cash estimation model developed by Bates et al. (2009). The paper applies linear regression analysis with fixed effects by firm and year. Based on the findings, we confirm that general managerial ability is a valid determinant of corporate cash holdings. We find supportive evidence that extensive levels of human capital generality may result in a higher level of cash. Additional findings indicate that the effect of general managerial ability on the cash to total assets ratio is higher for financially constrained firms. We further show that the positive impact of general managerial ability on cash holdings is more evident for firms with higher levels of industry competition and low-tech industries. The empirical findings should assist investors, financial analysts, and shareholders in better understanding the CEOs’ effect on cash holdings at the firm level. This study addresses the debate concerning the implications of CEO experience in firm-level context. We contribute to the literature by examining how corporate policies are linked to managerial characteristics and how the CEO’s professional expertise influences corporate cash holdings. Our evidence adds to the existing knowledge about the real effects of CEOs skills and partially explains the variation in firm cash holdings.

Too much liquidity? Seemingly excess cash for innovative firms

AbstractWe show that more cash allows innovative firms facing financing constraints to undertake more research and development projects and that this phenomenon has been more pronounced since 1980. In contrast to the secular increase in the level of cash holdings, average excess cash has not increased appreciably. We analyze excess cash disposition and document a strong relation between excess cash and research and development spending. Finally, our results suggest that increased difficulty in valuing research and development might be a source of financing frictions. These findings imply that “seemingly excess cash” has played an increasingly important role in mitigating underinvestment in innovation.

The Effect of Firm Cash Flow on Investment Decision Moderated by Financial Constraint and Mispricing

This study aims to examine the effect of cash flows on investment decision that is moderated by financial constraint and mispricing. The population of the study was all listed-manufacturing firms in Indonesia from 2014 to 2016. Samples were chosen based on the availability of firms’ financial report covering the period of the study. By using moderated regression analysis where financial constraint and mispricing as moderating variables, the study concluded that financial constraint weakens the effect of cash flow on investment. Although lower financially constrained-firms have an opportunity to choose their source of funding, they prefer to finance their investment from an internal source of funding (from cash flows) due to lower risk. Furthermore, mispricing does not have a role as a moderating variable. In this condition, overvalued firms are indifferent from choosing the source of funding. Finally, when financial constraint and mispricing are signed as a moderating variable, they weaken the effect of cash flow on investment. It means that firms with lower financial constraint and overvaluation prefer to use external funding by issuing new common stocks because it provides a lower cost of capital.

The impact of working capital management on cash holdings of large and small firms: evidence from Jordan

Liquidity is a firm’s ability to pay its current obligations as they come due and thus remain in business in the short run, which reflects the ease with which assets can be converted to cash. The objective of working capital management (WCM) is to minimize the cost of maintaining liquidity while guarding against the risk of insolvency, working capital policy applies to short-term decisions, and capital structure finance applies to long-term decisions.Several studies have been conducted on the impact of WCM on cash holding levels. The impact of WCM on liquidity and cash holding levels is analyzed in this study. The study also makes a comparison between large- and small-scale firms. Panel data for 62 Jordanian industrial firms covering an eleven-year period (2006–2016) have been analyzed. The descriptive analysis indicates that large firms hold more cash than small firms, as well as more debt, cash flow and growth.The findings of the data set indicate that WCM, as a variable (working capital net of cash), is a strong predictor of firm cash holding levels. When a firm has several cash substitutes, it will maintain low cash levels. The separate analysis shows that there are significant differences between small- and large-scale firms for determinates related to cash holding levels. Firm size and cash flow ratios were strong predictors of cash holding levels for both samples.

Ownership Hierarchy and Cash Holding: A Study From Pakistan

This study aims to investigate the impact of the ownership hierarchy on the retention of cash. Ownership structure has dissimilar from each organization as some firms have surplus cash holdings and some firms have fewer cash holdings. This study examines the pattern of shareholding in Pakistan and its consequences on holding of cash. Trade-off theory, peaking-order theory, and agency theory have already hashed out the sensation between cash holding and ownership structure. Fixed Redundant likelihood test, Hausman Test and Panel Data Regression model are used to compute the final results. This study involves 74 non-financial firms to investigate the prime effects. The data have been taken from the biggest database of Karachi Stock Exchange (KSE) 100 index Pakistan and company financial reports from the period 2006 to 2017. Significant findings of this paper are based on two different research questions. First, how the pattern of shareholding has an impact on the decision of cash holding? Second, how the boundaries of the firm affect cash holding? These findings imply that cash holding and ownership structure are a vital element of the firm’s financial policy. This paper concludes that there is a negative and substantial relationship between cash holding and the pattern of shareholdings and the boundaries of the firm have an imperative effect on the holding of cash.