Corporate Cash Policy Research Articles

Corporate “dash-for-cash” amidst the Covid-19 Pandemic: Evidence from an Emerging Economy

This paper seeks to examine the impact of Covid-19 pandemic on corporate cash holding. The research collects data from 531 listed Vietnamese firms for the period 2020Q1-2021Q1. The data are analyzed using panel Fixed Effect model. Results show that corporations hoard more cash in response to the Covid-19 pandemic. This can be attributed to firms’ precautionary purpose and investment delays to a limited extent. Firms’ increased cash holdings are channeled through conservative payout policy. The results further reveal that hoarding cash amid the pandemic alleviates the adverse impacts of the Covid-19 outbreak on investment. Previous studies identified various determinants that affect firms’ cash holding. Our study adds another critical factor, a rare disaster, as an important determinant of corporate cash policy.

Corporate cash policy and double machine learning

Corporate cash policy and double machine learning

Oil price uncertainty and corporate cash policy: does Islamic financial development matter?

Oil price uncertainty and corporate cash policy: does Islamic financial development matter?

HOW DOES CSR STRATEGY IMPACT CORPORATE CASH POLICY IN EMERGING MARKETS? EVIDENCE FROM THE COVID-19 OUTBREAK

This study investigates the impact of corporate social responsibility (CSR) strategy on corporate cash policy in emerging markets, with a specific focus on the COVID-19 pandemic period. By analysing data from 7,731 firm-years across 30 developing countries during the period 2002-2021, the study finds that CSR has a negative effect on cash holdings. In other words, firms with lower CSR investment tend to hold more cash. However, an interesting finding is that the negative impact of CSR on cash holdings lost its significance during the COVID-19pandemic. This suggests that during this unprecedented period of economic uncertainty and disruption caused by the pandemic, firms with higher CSR were more inclined to hoard cash as a precautionary measure. In contrast, in normal times, the dominant motive for holding cash appears to be related to agency concerns. Furthermore, the study identifies countryspecific variations in the relationship between CSR and cash holdings. For instance, firms in Brazil and Saudi Arabia tend to use cash retention as a response to higher CSR, while firms in Argentina, Malaysia, Mexico, Poland, Taiwan, and Turkiye exhibit the opposite behaviour, using higher CSR as a signal for reduced cash holdings. Additionally, the study sheds light on industry-specific differences in the relationship between CSR and cash holdings. Beverage, construction and material, industrial material, oil, gas, and coal, technology hardware and equipment, telecommunications service provider, and travel and leisure firms are more likely to use cash holdings as a substitute for CSR, while alternative energy and media firms show the opposite pattern, using higher CSR as a signal for reduced cash holdings.

Temperature trend and corporate cash holdings

AbstractWe examine the causal impact of climate uncertainty on companies’ cash holdings using local temperature trends. We find a notable increase in cash reserves among companies in response to rising climate‐related risks. We also identify two significant channels through which climate uncertainty influences firms’ cash management: heightened environmental enforcement risk and increased physical risk. Furthermore, we observe that the positive effect of temperature trends on cash holdings is more pronounced for financially constrained firms and those with a lower level of environmental protection awareness. External financing through equity and debt issuance, as well as cost reduction strategies involving research and development and selling, general, and administrative activities, represent viable avenues for firms to bolster their cash reserves. However, financially constrained firms are less inclined to build up cash reserves through debt financing. Our findings underscore the precautionary nature of corporate cash policies and shed light on how temperature fluctuations can significantly shape corporate behavior.

The impact of the COVID-19 pandemic exposure on the corporate cash policy of Vietnam-listed enterprises

The purpose of this study was to assess the impact of the COVID-19 epidemic on the daily stock returns of 177 businesses listed on the Vietnam Stock Exchange during the period spanning from the second quarter of 2020 to the first quarter of 2023. Next, we proceed to evaluate the influence of COVID-19 exposure on the cash holding ratio of these enterprises. We used research methods for panel data, such as the fixed effects method and the system GMM method. Our findings demonstrate that the exposure of enterprises to the COVID-19 pandemic has a discernible and statistically significant adverse effect on their financial reserves. When conducting research on the transmission channel of COVID-19 exposure to cash holding policies, we found that this impact persists in firms through financial frictions. Based on the findings, we have put forth several policy implications for businesses to formulate cash management policies in anticipation of future pandemics of a similar nature.

Managing liquidity along the supply chain: Supplier‐base concentration and corporate cash policy

AbstractWe find that customer firms with more concentrated supplier bases tend to hold higher levels of cash reserves. The positive relation between supplier‐base concentration and cash holdings is more pronounced for firms with nonstate ownership, higher market competition, worse inventory efficiency, more relationship‐specific investment, central positions in the production networks, and headquarters located in regions with lower levels of financial development. Furthermore, we show that debt issuance enhances firms' cash holdings when they have concentrated suppliers, and supplier‐base concentration increases firms' cash spending on R&D investment. Our study highlights the importance of supplier structure in shaping corporate cash policy.

The impact of firm risk on the value of cash holdings: The moderating role of corporate social responsibility

This study investigates the impact of firm risk on the value of cash holdings, and how corporate social responsibility (CSR) affects this relationship considering controlling shareholders. Using a sample of Taiwanese publicly listed firms from 2005 to 2018, we find that firms' CSR activities are more positively associated with the value of cash holdings because of controlling shareholders' incentive effects in most cases. Moreover, the precautionary view suggests that high-risk firms positively influence the value of cash holdings. Interestingly, considering controlling shareholders weakens the moderating impact of CSR engagement on the relationship between firm risk and value of cash holdings. Thus, CSR is an important determinant of corporate cash policies among Taiwanese firms. Our empirical results provide managers, investors, and policymakers with important decision-making insights.

The effect of proximity to political power on corporate cash policy

We expand on prior evidence that national-level policy uncertainty affects corporate cash policies and hypothesize that political geography has a significant effect on corporate cash holdings as bi-annual shifts in firms' location on the political map give rise to both time- and spatially-varying levels of exposure to policy risk. We use a state-level index of political alignment with the President as a proxy for political geography and empirically confirm that companies headquartered in states closely aligned with the President tend to increase their cash holdings. Moreover, and in line with the notion that policy uncertainty associated with proximity to political power provides a precautionary motive for holding more cash, the cash flow sensitivity of cash is more pronounced among firms that are financially constrained and politically unconnected. Finally, our tests suggest that such corporate cash management policy in the face of exposure to policy risk can have value implications.

Global Research of Future Trends and Development in Cash Holding: A Bibliometric View

Cash holdings are becoming a growing issue for worldwide scholars in finance to understand the importance of the strategic approach of corporate cash policy of cash reserves. In practice, firms have faced challenges in adopting an appropriate corporate cash holdings policy. It would be appropriate to study the notions of cash holding (CH) to explore suitable strategies to overcome the inadequacy of financial policy of cash reserves in the financial system worldwide. Thus, this paper aims to conduct a bibliometric analysis and fill this literature gap by identifying and evaluating the current status and developing trends of the cash holdings domain to provide meaningful insights and assist in further discussion. Bibliometric studies have proven to be beneficial in helping researchers better exploring the current research trends in a particular field of research. From Scopus database, this study identifies the knowledge evolution trend in the field of cash reserves or cash holdings, where 1,073 published articles from year 1971 to 2022 were reported. The current study's findings demonstrate that the number of publications in the domain of cash holdings has intensified in the past few years. The results also identify that Economics, Econometrics, and Finance were the more popular subject categories in the field of cash holdings from the past few decades. In terms of keyword analysis, the most frequently used keyword by authors associated with cash holdings are corporate governance and financial constraints. Moreover, co-authorship with researchers finds that most collaboration has taken place among United States, China, and the United Kingdom. Finally, citation analysis reveals the Journal of Corporate Finance dominates this field of research. Future strings of research should focus on the cash holdings and financial constraints, investment and external drivers that have an effect on cash holdings.

Demystifying the Relationship between Corporate Cash Holdings and its Determinants in Indian Firms

There are two schools of thought regarding cash policy, where one sect finds cash policy is insignificant in today’s perfect capital market condition and the other feel corporate cash policy is the key determinant of company growth and success. Corporates constantly balance in maintaining cash reserves to cushion against future contingencies. Shortage of liquid assets may affect the operation of the firm. Cash management of any firm is bounded by precautionary, transaction, and speculative motives. Various predominant factors influence a company’s cash reserve policy. The natures of business and R&D expenditure are a few key determinants that demand a firm to maintain a certain level of cash. At the same time maintaining an optimum cash balance is becoming hypothetical under the current scenario. The Company must take an optimum cash policy so that it should not remain ideal without generating any return. This paper is to analyze the impact of cash policy and cash holding patterns of Indian firms. The paper has tried to uncover certain determinants of cash holding. The study highlights the relationship between variables such as cash ratio, leverage, and size of the firm. Panel data regression and the Random Effect model are used. The sample for the study is non-financial companies with ten years data set.

Firms’ COVID-19 Pandemic Exposure and Corporate Cash Policy: Evidence from China

The COVID-19 pandemic adversely impacted economic activity, decreased corporate revenues, and magnified cash flow fluctuations. We study how Chinese listed firms' COVID exposure influences their cash holdings. A firm's COVID exposure is measured by its excess stock return responses to globally newly infected cases while controlling for market return. Firms increase (decrease) cash balances when their stock returns fall (increase) with COVID severity due to precautionary motives. Firms cannot predict the evolution of the pandemic, which impacts demand and supply and the cash conversion cycle. The deteriorating business condition also increases external financing costs with non-state-owned, low-growth, small, and firms without overseas businesses facing higher financial frictions. Furthermore, firms with good corporate governance tend to pre-empt operational uncertainty by increasing cash holdings. The increased cash holdings translate to more R&D expenditure but lesser capital investment. Our results remain robust to placebo tests, using excess cash and alternative COVID exposure measures.

The religion effect on corporate cash holding in China: Buddhism and Taoism

AbstractBuddhism and Taoism have been deeply rooted in China for generations and both of them have a profound impact on the local culture and social norms. By employing 23,999 firm‐year observations between 2008 and 2018, we examine how local religious norms affect corporate cash policies. We provide strong evidence that religiosity significantly reduces the level of corporate cash holdings, by mitigating financial constraints and earnings management of the listed companies. Managers from religious areas make more effective investments and distribute more dividends. Furthermore, our findings document that religion has a more pronounced influence on cash holdings amongst the firms with the smaller size, lower leverage, higher marketization, effective internal control and facing fierce market competition. Overall, Buddhism and Taoism, constituting the main religious norms in China, significantly optimize the firms' cash holdings and firm value.

Cost of carry, financial constraints, and dynamics of corporate cash holdings

This paper provides new evidence on how the cost of carry is linked to corporate cash policy in the presence of financial frictions. Using both time-series and firm-level data for US public and private manufacturing firms, we find a negative correlation between cash holdings and the cost of carry for financially unconstrained firms. We find no evidence of such a relation for financially constrained firms. Our results suggest that financial constraints play an important role in adjusting cash to changes in the cost of carry. We introduce a simple model in which firms differ in their cost function of external finance, where the constrained firms' highly curved cost function drives a steeper cash demand, leading to their lower cash sensitivity to the cost of carry.

Managerial risk-taking incentives and cash holding in U.S. firms: Evidence from FAS 123R

Employing FAS 123R, which mandated option expensing, as a quasi-natural experiment, we investigate the causal effects of CEO risk incentives (vega) on cash policies of U.S. firms. Employing a difference-in-differences framework with propensity-score matching, we find no association between changes in CEO portfolio vega and corporate cash holdings, including the marginal value of cash. Our finding applies to both firms most and least affected by the regulatory change. Thus, our evidence challenges the view that stock options are a first-order determinant of corporate cash policy, implying that any previously documented relation may reflect endogeneity rather than a causal influence.

Investment Of Product Market Peers And Corporate Cash Policy

Investment Of Product Market Peers And Corporate Cash Policy

Collective bargaining power and corporate cash policy

This paper provides novel evidence on the role of labor unions in firms’ corporate cash policy. Examining the unionization rates of firms across 29 countries for the period 2004–2015, we show that firms respond to an increase in unionization rate by decreasing their corporate cash holdings. The reported effect is symmetric, in that firms respond to increases (decreases) in unionization rate by decreasing (increasing) their cash buffers. These results are consistent with the bargaining hypothesis, namely, that firms strategically decrease their cash level to counter the rise in employees’ bargaining power due to increased unionization. Additionally, we find that the negative effect of unionization on cash holdings is more pronounced in labor-intensive, large, high-growth, high profitability, and low labor productive firms. The countries’ quality of institutions intensifies the documented relationship, what is in line with the cost economies theory. Moreover, we exploit shocks to the economies and show that increase in the unionization following a banking crisis influence negatively firm's cash levels. These findings are robust to different unionization variable constructions, alternative dependent variable definitions, controlling for potentially correlated time-variant firm characteristics, saturation of a dense set of fixed effects, and endogeneity concerns.

Financial Hedging, Corporate Cash Policy, and the Value of Cash

AbstractWe study the implications of financial hedging for corporate cash policy and the value of cash holdings. Using a web crawler program to collect data on the use of financial derivatives between 1993 and 2016, we find that US public firms with financial hedging programs have smaller cash reserves but a higher value of cash than firms without hedging contracts in place. Our empirical results are robust when controlling for potential endogeneity issues, corporate governance, cash regimes and alternative measures of cash holdings. Further, we find that financial hedging not only increases the investment sensitivity to internal cash, but also has a positive effect on investment efficiency. The positive effect of financial hedging on the value of cash is more pronounced for firms with more financial constraints, higher information asymmetry and weaker corporate governance. Collectively, our paper highlights the importance of corporate cash policy as a channel through which financial risk management increases firm value.

Corporate cash holdings and firm life cycle: evidence from China

Purpose The purpose of this paper is to investigate how corporate cash holdings changes across firm life cycle and how firms undergo heterogeneous dynamic cash adjustment as they advance from one stage to the next stage. Design/methodology/approach This study uses an extensive data set of 2,994 Chinese A-listed firms. The authors use generalized method of moments (GMM) and Fisher Panel unit root testing to investigate the targeting behavior of Chinese firms. Findings The uni-variate investigation reveals that firms in the growth stage exhibits the highest cash levels and firms in the decline stage report the lowest cash levels. As growth firms have high investment needs, they may require raising external capital to meet investment needs. To avoid the costly external financing, firms in growth stage tend to hold more cash. The GMM estimation reveals that along all the phases of firm life cycle there are evidences of trade-off behavior of corporate cash holdings. The authors report that adjustment rate increases as firms enters into the growth stage. Practical implications The findings provide both theoretical and practical insight to align cash policies with the available strategic choices along firm life cycle in an emerging market characterized by market imperfections. Originality/value The study is unique from the context that it is applying robust methodology to one of rarely investigated area in corporate cash policy. The peculiar Chinese study setting characterized by higher information asymmetry, high cost of external financing and heterogeneous access to financing sources provide theoretical and empirical underpinnings to investigate and gain insight about how corporate cash policy can be aligned with strategic choices available across different stages of life cycle.

The effect of corporate environmental responsibility and religiosity on corporate cash holding decisions and profitability: Evidence from the United States' policies for sustainable development

AbstractWe use religious background as a proxy for local risk‐taking attitudes and investigate whether geographical variation in religion affects corporate environmental responsibility (CER) with regards to corporate cash policies and profitability. We conjecture that the presence of environmentally conscious firms would be higher in areas with more Catholics relative to Protestants. Study data comprises of the largest publicly traded U.S.‐listed firms of Newsweek's green rankings of 2015–2016. We use green scores and the concentration of Catholic to Protestant population ratio as proxies for CER and religiosity, respectively. We provide robust evidence that corporate environmental practices attenuate the demand for precautionary cash reserves to protect firms from unforeseeable risks. Furthermore, environmentally conscious firms located in high risk‐taking areas gain financial stability and improve profitability, strengthening their CER. The findings provide contributions to risk management literature and document the importance of firms' efforts to harmonize social behavior for sustainable financial policies.