Changes In Cash Holdings Research Articles

Can Repatriation Tax Holidays Teach Us Something About Monetary Policy Transmission?

AbstractI study the “bank lending channel” using the 2004 repatriation tax holiday as a natural experiment. I isolate the effect of the repatriated funds on loan supply by (i) comparing the differences in lending between multinational and domestic banks pre‐ and postrepatriation and (ii) using the change in cash holdings abroad as an instrument for the repatriated funds. My results support the existence of the “bank lending channel.” I document that each additional repatriated dollar led to an increase of $0.04 in lending, which is driven entirely by commercial and industrial loans.

How R&D intensive firms react to the COVID-19 pandemic: Evidence from a quasi-natural experiment

Prior research suggests that R&D intensive firms are especially vulnerable during crises due to their narrow specialization, high adjustment costs, increased distress risks, and higher sensitivity to financial distress. This paper exploits the difference in the research and development intensity as a quasi-natural experiment to examine the impact of the coronavirus pandemic on firm performance. Our study finds that the adverse consequences of COVID-19 on firms' profitability have been less pronounced for R&D intensive firms. R&D intensive firms are also able to record more positive changes in cash holdings as a response to the COVID-19 pandemic. As a result, R&D intensive firms are less likely to rely on external financing and record a lower level of increase in financing. Our results further highlight the potential function of R&D investment as a panacea for firm's growth during economic downturns.

IRS Private Letter Rulings: Initial Evidence on Determinants and Consequences

AbstractThis study examines the determinants of firms' requests for Private Letter Rulings (PLRs) from the US Internal Revenue Service (IRS) and their impact on firms' cash holdings. Our results show that PLR requests tend to be made by firms with more active tax planning, more acquisitions, higher analyst following, higher leverage, and less in‐house tax expertise. We also show that firms with IRS audit red flags are less likely to request a PLR. We use a difference‐in‐difference approach to assess changes in cash holdings following PLR requests and report a decrease in cash holdings for PLR firms, consistent with the notion that PLRs act to reduce tax uncertainty. Our study provides the first empirical evidence about the determinants of PLR requests and complements prior work on tax uncertainty and cash holdings (Hanlon, Maydew and Saavedra, 2017).

Corporate cash and the Firm's life-cycle: Evidence from dual-class firms

This research explores whether a dual-class ownership structure affects a firm's propensity to stockpile cash reserves over the life cycle stages. Using a sample of U.S. dual-class firms, evidence shows that the cash holdings of dual-class firms are significantly lower than that of single-class firms by 2.42%. The dual-class firms that exploit external debt financing deploy more cash for acquisition activities. More importantly, dual-class firms decrease their cash holdings by only 2.8% when growing from young to mature, while single-class firms decrease that by 5.88%. During the mature stage, the dual-class firms experience a larger fall in operating net cash flow, cash acquisition expenditure, and debt financing than do single-class firms. These findings, however, are only significant for firms with high information asymmetry. Our evidence of changes in cash holdings shows that agency costs associated with dual-class ownership increase over the life cycle.

Changes in cash levels of public companies in Poland in the period 2001–2019

Background: The subject of this paper is related to cash management and determinants of companies’ cash holdings within the framework of corporate finance theory. One phenomenon that has received considerable attention is the upward trend in cash holdings of US public firms, which has been explored in a number of US studies. There are no studies explaining whether cash management trends in Poland are similar to those observed in the biggest world economy. In empirical studies devoted to cash management in Poland, the analysis of aggregate data has been of little interest.
 Research purpose: The focus of this article is on presenting the course of changes in cash holdings maintained by public companies listed on the Warsaw Stock Exchange in the period from 2001 to 2019 and explaining them in the framework of corporate finance theory.
 Methods: Changes in the average and aggregate cash-to-assets ratio were analysed. In order to determine how these changes of cash-to-assets ratios are explained with changes of selected macro- and microeconomic variables, linear regression models for firm-averages and panel data models were estimated.
 Conclusions: The study shows that changes in cash holdings of listed companies in Poland differed from the trends observed among big US corporations. It also indicates that companies’ approaches to cash management were very much aligned with that explained by the finance theory

Market value of 10-K readability and corporate cash holdings

We investigate the effect of 10-K readability on the association between stock returns and changes in cash holdings and find that readability significantly increases the marginal value of cash holdings (MVCH). The value spread for firms with high-readability reports is about US $0.08 per dollar of cash. This effect is stronger for firms with more severe managerial agency problems, less external monitoring, and greater financial constraints. Additional analyses suggest that the direction of causality runs from readability to the MVCH. We posit that more readable 10-Ks facilitate investors’ monitoring, inducing firms’ efficient cash use.

Information Shocks and Corporate Cash Policies

ABSTRACTWe examine how information environment affects corporate cash policy by examining the change in cash holdings around two events that lead to exogenous change in information environment, namely the initial enforcement of insider trading laws (ITLs) and the mandatory adoption of IFRS in European Union (EU) countries. Using a difference-in-differences approach, we find that firms decrease their cash holdings after both events. The decrease in cash holdings is more pronounced for firms with higher precautionary savings demand and with more severe agency problems. Additional tests show that the sensitivity of investment to cash holdings declines after the two events, consistent with the notion that the benefit of cash holdings in mitigating underinvestment and the private benefit of overinvesting cash holdings reduce after the events. Overall, our findings provide evidence that information environment improvements have real decision effects.JEL Classifications: M41; M48; G31.

Impact of economic policy uncertainty on cash holdings: firm-level evidence from an emerging market

ABSTRACT We examine how economic policy uncertainty (EPU) affects firms’ cash holdings and how such changes in cash holdings affect firm value and capital investment in China. Our findings suggest that firms that increase their cash holdings during high EPU have higher firm values and are less negatively impacted by the underinvestment problem. When a firm is non-state-owned, financially constrained, or is located in a province with low marketization, the impact of EPU on cash holdings is amplified. Furthermore, state-owned enterprises (SOEs) are less likely to increase cash holdings during elevated EPU, and consequently tend to have lower firm values.

The Impact of Inflation and Operating Cycle on the Corporate Cash Holdings in South-East Europe

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.

R&D investments and corporate cash holdings

ABSTRACTThis paper presents evidence about how research and development (R&D) expenditures affect corporate cash holdings in European country groups that differ in their innovation capacity. In theory, one can expect intangible investments such as R&D to result in higher cash stocks than fixed investments, particularly because intangible capital is less suitable as collateral for obtaining external funds. The relationship can be expected to be particularly strong in innovative countries. These countries carry out a relatively high proportion of cutting-edge R&D, which tends to be particularly risky and may be associated with substantial gestation lags before becoming productive. These features tend to increase firms' precautionary cash holdings. To investigate this issue in a European context, we examine different groups of countries that are clustered based on differences in their innovative capacity. Our estimation results confirm a positive relation between changes in R&D investment and changes in cash holdings, whereas changes in fixed investment do not appear to be related to changes in cash positions. The impact of changes in R&D on cash tends to be higher for country groups characterized by a high level of innovative capacity than for countries with moderate levels of innovative capacity. However, the differences across country groups are less pronounced than expected.

Hedge Fund Liquidity Management

We find that asset illiquidity in hedge funds is typically lower than combined liabilities and equity illiquidity, i.e., hedge funds tend to exhibit negative liquidity mismatch. Using hedge fund regulatory filings of Form PF over 2013-2015, we find that negative liquidity mismatches are more pronounced among larger funds, funds with lower leverage, funds in which managers have a greater personal stake, and when market volatility is lower. We also find support for existing theories of liquidity management: Funds holding more illiquid assets are associated with longer committed periods of investor financing, and the absence of long-term commitments from investors and lenders predicts greater cash holdings and unused borrowing capacity, respectively. Finally, quarterly changes in cash holdings and unused borrowing are negatively related to current and future investor flows and fund returns, suggesting that managers increase liquidity buffers in response to investor outflows, negative performance and ahead of financial distress. Our findings of a negative relation between cash buffer changes and outflows contrast sharply with recent mutual funds studies. We find that hedge funds’ right to enact so-called “discretionary” liquidity restrictions plays an important role in explaining this difference.

Cash Holdings and CEO Turnover

Chief Executive Officer (CEO) characteristics, such as the level of risk aversion, are known to affect corporate financial policies, and therefore are likely to impact corporate liquidity decisions. We examine changes in cash holdings around CEO turnover events, a period in which discrete changes in managerial preferences and abilities are likely to have the most dramatic effect on cash holdings. Our results suggest that cash holdings increase significantly following forced departures. The increase is persistent over the successor’s tenure and is robust to controls for the standard firm-level determinants of cash holdings and corporate governance characteristics. We find that higher cash holdings arise mainly through the management of net working capital, as opposed to asset sales or reductions in investment. This suggests that the changes are optimal for shareholders rather than an indication of serious agency problems. This conclusion is supported further by our finding that the marginal value of cash does not decrease following the turnover.

Corporate Exposure to Macroeconomic Uncertainties and Cash Holdings

This study aims to clarify the understanding on the relationship between the firm’s cash holdings and its causes by introducing the more detailed relationship between cash holdings and macroeconomic uncertainty. While previous literature tries to explain the level of cash holdings mainly by the firm-level variables with the partial inclusion of macroeconomic uncertainty, this study considers the full impact of the macroeconomic uncertainty on the change in the level of cash holdings by understanding and introducing the firm’s heterogeneous exposure to macroeconomic uncertainty. Firms’ heterogeneity to macroeconomic uncertainty is introduced in the test to see if the heterogeneity can tell the difference in the change in the level of cash holdings. This paper finds that macroeconomic uncertainties measured by difference macroeconomic condition variables are significant and contribute to the change in cash holdings. Additionally, this paper shows that the firms’ different level of exposure to macroeconomic uncertainty can cause the different degree of cash holdings and that firms with the higher level of exposure have the higher level of cash holdings. This paper can be improved and expanded in many ways such as an expansion with the inclusion of international macroeconomic variables as additional significant factors for the change in the level of firms’ cash holdings.

Innovation and credit constraints: evidence from Swedish exporting firms

ABSTRACTUsing data from approximately 8300, primarily small, exporting firms in Sweden observed over the business cycle period 1997–2007, we examine the relationship between innovation and financial factors in a regression that include changes in cash holdings, cash flow and debt issues. Our nonlinear econometric approach with interaction variables between recession period, technology intensity and finance suggests that innovative firms in high-tech sectors tend to offset the effect of a negative financial shock by exploiting internal cash resources. No corresponding link between innovation and financial factors is found for medium and low-technology exporters.

Cyclicality and the Value of Cash Holdings

We show that business cycle dynamics and, in particular, the cyclicality of a firm’s growth opportunities, determine the value of cash holdings. Cash is more valuable for firms with relatively more attractive growth opportunities in bad states of the business cycle. Cash holdings provide the flexibility to invest even in times when capital supply is scarce. This valuation effect is strongest for low leverage and high R&D firms, but is independent of their financial status. In firms where changes in cash holdings exert a stronger effect on stock returns, investment and operating performance are also more sensitive to cash holdings.

The Compensation Benefits of Corporate Cash Holdings

Although compensation contracts rarely include cash holdings as a factor, we show that high cash holdings can be used by executives in the ex post bargaining over compensation. An increase of cash holdings by 10% of assets corresponds to about $2.7 million in additional CEO total compensation. In companies with weaker governance, the relation is even stronger. Using awards and losses associated with corporate litigation as exogenous shocks to the firms’ cash, we show that CEO compensation readily responds to these changes in cash holdings, confirming that managers are able to derive personal benefits from excess cash holdings.

Corporate Cash Holdings and Financial Crisis: Evidence from Jordan

The focal point of this study is to investigate whether the Jordanian companies hold more cash after the financial crisis compared to before the financial crisis and which theories can explain these cash holdings. This work addresses the following questions: 1) what determine the corporate cash holdings in Jordan in normal time and during crisis. 2) How do the financial crises affect the policy of cash holding in the Jordanian firms? This study investigates the effect of capital expenditure, profitability, cash flows, investment (growth) opportunities, leverage, and ability to access capital markets, dividend’s payment and liquid assets substitutes. The study use data from 47 industrial companies listed at Amman Stock Exchange (ASE) during the period 2001 to 2011, with total 517 firm-year observations. The study time period was divided into four sub periods to assess the changes in cash holdings during each period. Panel regression was applied to examine the study model; also ANOVA test was used to test the differences in means for each sub period. Our results show that; Jordanian companies tend to increase their cash holdings because of financial crisis by increasing debt, decreasing investment activity and reducing payouts to shareholders. Moreover, the study show a different patterns in cash holdings during the pre crisis period and the post-crisis period, also there is a different patterns in cash holdings during the base period and the pre-crisis period. In addition, the main theories that explain the changes in cash holdings for the Jordanian companies were trade off theory and the pecking order theory. Generally speaking, our results support the trade off theory. The precautionary motive founded to be the most important motives for the Jordanian firms to hold cash. Generally, Cash flow, liquid assets substitutes, degree of financial leverage and dividend payment policy are the most important determinants of corporate cash holdings in Jordan.

Do CEO Beliefs Affect Corporate Cash Holdings?

We develop an expanded trade-off model of cash holdings that incorporates CEO beliefs. The optimistic CEO views external financing as excessively costly but expects this cost to decline over time, thus delaying external financing and maintaining a lower cash balance than rational CEOs. We find that, relative to rational CEOs, optimistic CEOs hold 24% less cash, exhibit a lower change in cash holdings over time, hold lower cash to fund the firm's growth opportunities, and save less cash out of current cash flow. We confirm our findings with two different samples of firms and two alternative measures of optimism.

Changes in cash holdings around the S&P 500 additions

We analyze the changes in cash holding policies of S&P 500 firms from before to after their inclusion in the index. One year after inclusion, their mean industry-adjusted cash holdings decline by nearly 32% from the year before inclusion. Several factors explain this decline. The precautionary motive for cash subsides due to these firms becoming more visible, less uncertain, and less constrained to raise cheap external capital. Corporate governance deteriorates after inclusion due to increased managerial entrenchment, which leads to a reduction in cash as suggested by the free cash flow hypothesis. Most index firms face diminishing investment opportunities and decreasing capital expenditures, which implies a lesser need for cash holdings related to the transaction motive.

Change in Cash-Holding Policies and Stock Return Predictability in the CrossSection

The author found that stocks with a positive change in company cash holdings have significantlyhigher risk-adjusted returns than stocks with a negative change in cash holdings (CCH). Moreover,the return predictive power of CCH is (1) distinct from the effect of cash holdings (CH), (2) absentamong cash-rich companies, (3) stronger among small-cap stocks, and (4) limited to non-Januarymonths. The CCH anomaly appears to be more “contaminated” than the CH effect bymispricing.