Determinants Of Cash Holdings Research Articles

Determinants of corporate cash holdings: Evidence from Portuguese publicly traded firms

This paper investigates the determinants of cash holdings of publicly traded Portuguese firms. We find that such firms hold less cash than similar companies operating in countries where both shareholders and creditors’ rights are more tightly protected by the law. In addition, our regression results suggest that leverage, other liquid assets, and firm growth are negatively correlated with our sample firms’ cash holdings whereas long-term debt and financial distress are positively correlated. Our findings cannot be reconciled with just one of the existent theories (trade-off, pecking order and free cash-flow theory), and emphasize the importance of a country’s legal, institutional, and economic environment for explaining firms’ cash holdings decisions.

Analysis of the determinants of corporate cash holdings: Examples from companies in Serbia

In this study, we aimed to analyse the empirical determinants of cash holdings on the sample of non-financial companies operating in the Republic of Serbia. For that purpose, dynamic panel data models were estimated by utilising the generalised method of moments for the period from 2008 to 2013. The econometric analysis indicates that companies with higher cash flow hold more cash in their assets. Larger companies as well as companies with more liquid assets and higher turnover coefficients tend to reduce their cash levels. According to the results, companies operating in the Republic of Serbia tend to hold the optimal level of cash and prefer internal sources of financing, which is in line with the principles of trade-off theory and pecking order theory.

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.

Determinants of Cash Holdings in Multinational Corporation's Foreign Subsidiaries: US Subsidiaries in China

AbstractManuscript TypeEmpiricalResearch Question/IssueWe examine determinants of cash holdings in Chinese subsidiaries of US multinational corporations (MNCs), a setting where growth opportunities make cash holdings desirable for investment opportunities but also vulnerable to potential expropriation because of poor investor protection.Research Findings/InsightsWe show that headquarters accumulate larger cash holdings in foreign subsidiaries with locally registered patents and in foreign subsidiaries operating in the same industry as corporate headquarters. Further, foreign cash holdings are higher when these are safeguarded by a subsidiary board. Moreover, the effect of shared industry on subsidiary cash holdings is larger when a board is installed in the subsidiary. Finally, the positive relation between a subsidiary's capability to innovate and to transfer knowledge and its level of cash holdings is stronger when the subsidiary is led by US expatriate CEOs.Theoretical/Academic ImplicationsOur results indicate that MNCs accumulate cash in foreign subsidiaries with innovation and knowledge transfer capabilities. Furthermore, and in line with agency theory, we find that MNCs safeguard foreign cash via the installing of subsidiary boards and expatriate CEOs. These findings suggest that the installing of monitoring devices are crucial in reducing the potential expropriation risk of foreign cash holdings.Practitioner/Policy ImplicationsOur study highlights the importance of considering foreign subsidiaries' positions in innovation and in knowledge transfer when MNCs make decisions on the levels of overseas cash holdings. It offers insights regarding the importance of subsidiary boards and expatriate CEOs in monitoring and controlling foreign subsidiaries.

Regional Differences in the Determinants of Cash Holdings

This study investigates the existence of differences in the influence of firm characteristics on the level of cash across geographic regions. I tackle this question by undertaking a meta-regression analysis and find that geographic regions affect the association between firm characteristics and the level of cash. The influence of cash-determinants is similar in North America and Europe but different in Asia. The cause of this difference remains unclear. Results indicate that Asian firms are potentially affected by country-level agency concerns or a lack of financing alternatives. Regional differences persist after controlling for firm-level information asymmetries, country characteristics, and temporal trends.

The joint determinants of cash holdings and debt maturity: the case for financial constraints

We examine the joint choices of cash holdings and debt maturity for a large sample of firms for the 1985–2013 period. We find that there is a positive relation between debt maturity and cash holdings. Our results hold after taking into account endogeneity among leverage, debt maturity, and cash holding. We posit that this positive relationship will be found among firms facing financial constraints and we find support for this hypothesis. Our results are robust after we control for agency problems, international taxation, bank loan liquidity covenants and default risk.

Analyzing the Determinants of Cash Holdings of Small and Medium-Sized Entities in Nigeria

Purpose: This paper aims to report the results of an empirical investigation on the determinants of the cash holdings for small and medium-sized entities. The paper considers the different explanatory factors of SMEs cash holdings for a sample of Nigerian SMEs. SMEs are springboard of the Nigerian economy contributing to gross domestic product, employment generation and industrialization.
 Methodology: the study employed panel data regression analysis using secondary data on a sample of 311 Nigerian SMEs for the period 2007 - 2013. 
 Result: The finding which is robust of endogeneity shows statistically significant association between cash conversion cycle, account receivables period, return on assets and board size with SMEs cash holdings. Also found a significant relationship between cash holdings with firm size, leverage, growth opportunities and firm age. 
 Implication: Thus, the result of the study indicates that Nigerian SMEs with shorter cash conversion cycle and low growth opportunities hold more cash. Similarly, SMEs with small board of directors accumulate large cash balance. Further, SMEs with higher profitability keep large cash balance. This study contributes to existing literature on the determinants of SMEs cash holdings more specifically in developing economies. However, this study is limited to non-financial and non-service SMEs. Future study should extend the investigation to financial and services firms. Similarly the structure of the paper and scope of further study may be extended to include the effects of more corporate governance mechanisms.

Multinational Firms and Cash Holdings: Evidence from China

This paper is the first to study the determinants of cash holdings of multinational firms in China from 2000 to 2013. Using different cutoffs of foreign sales ratio, we show that Chinese multinational firms do not hold significantly more cash relative to non-multinationals, except for the cutoff of 50% foreign sales ratio. This insignificance is dominant in non-SOE subsample. We also find that Chinese MNCs invest more but are less profitable, especially in non-SOE subsample. Overall, we conclude that the need of liquidity of multinational corporations in China is different from those in America.

Multinationals and Cash Holdings

This paper challenges the widely accepted notion that firms’ cash holdings increase as they become more international. Using a novel dataset for 58 countries and alternative proxies of international activities, we show that multinationals hold less cash relative to domestic firms. We also investigate the role of diversification. The results show a direct negative relation between both geographic and industrial diversification and cash holdings. Our results suggest that multinationals selling multiple products in multiple geographic regions are in greater need of cash than focused multinationals. We also compare the determinants of cash holdings across developed and emerging markets, and find some asymmetric liquidity needs. Multinationals from emerging markets frequently need more cash to support their international expansion, whereas the opposite is true for developed-market firms.

Cash Holdings, Precautionary Motives, and Systematic Uncertainty

Prior literature has shown that U.S. firms hold large amounts of cash for precautionary reasons: faced by heightened uncertainty regarding future cash needs, firms choose to hold more cash. We decompose firm-level uncertainty into systematic and idiosyncratic components, and find that the systematic component, rather than the idiosyncratic component, explains firms’ cash holding decisions. We further decompose systematic uncertainty and find that uncertainty regarding macroeconomic policy, interest rates, and the market risk premium are important determinants of cash holdings. The results stem from the effect of macroeconomic level uncertainty on both the need for and the cost of external financing.

Refinancing Risk and Cash Holdings

ABSTRACTWe find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms’ long‐term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.

Do U.S. Firms Hold More Cash?

Using medians, U.S. firms do not hold more cash than similar foreign firms, irrespective of whether the foreign firms come from countries with good investor protection or not. With means, they do. The means, in contrast to the medians, are affected by U.S. multinationals. U.S. multinationals with high R&D expenditures hold 38.7% more cash than comparable foreign firms, but there is evidence that these high cash holdings may result more from high R&D expenditures than from multinationality. The crisis leaves only small traces in the recent cash holdings of firms. Firms throughout the world decreased their cash holdings during the crisis and replenished their cash holdings afterwards as expected with the precautionary motive for cash holdings. However, U.S. firms hold more cash than firms from countries where the stock market fell less during the crisis. There is no evidence that the determinants of cash holdings changed from before the crisis to after the crisis.

Determinants of Cash Holdings on Start-Ups

In this study, we examine the determinants of cash holding on Portuguese start-ups. We use a mandatory database that combines firm-level financial data with founder’s characteristics, for the period between 2006 and 2009. Unlike previous studies, we examine start-ups cash decisions on their first year and evaluate which founders’ educational and demographic characteristics are more likely to be associated with cash holdings. We find that start-ups’ cash holding levels are positively affected by the short and long-term debt and founder’s characteristics, and negatively affected by investment opportunities, size, liquid assets substitutes and founder’s educational levels . Overall, we can conclude that the Trade-off and the Pecking Order Theories are the ones that play the most important role in explaining the determinants of Portuguese firm’s cash holding levels.

What determines cash holdings at privately held and publicly traded firms? Evidence from 20 emerging markets

We provide one of the first large sample studies to examine how firm-level characteristics and national-level institutions affect cash balances in privately held and publicly traded firms and investigate whether the determinants of cash holdings for both types of firms are similar. Using panel analysis for data we analyze a sample of 9453 private versus 7319 public firms and 104,571 firm-year observations from Central and Eastern Europe over the period 2001–2010. We first show that privately held firms tend to hold more cash than publicly traded firms. Second, firms in more market-oriented countries, according to transition indicators, have larger cash reserves. Third, the same determinants of cash balances are relevant for both privately held and publicly traded firms regardless the stage in the transition to capitalism.

English

  The paper documents the monitoring effect of corporate disclosure and transparency on cash holdings on the Ghana Stock Exchange (GSE). The paper employs the Fama and French (1998) valuation model by relating firm level variables to firm value with panel data covering a period from 2002 to 2007 for 23 firms. It builds further on the agency theory and its relevance to emerging markets. We find that the relationship between corporate disclosure, transparency and cash holdings is economically significant and inversely related. We provide that a 1% increase in the composite disclosure and transparency index decreases cash holding by 0.0338 with the market also discounting the value of such firms by 0.0522. Additionally, we provide that firm size, profitability, financial leverage and investment needs are economically significant determinants of cash holdings.  The sample refers to only Ghana and the extent of generation of the findings could be affected. We argue that further research should be carried out using other country data to confirm or contradict our findings. The paper includes implications for the management of cash resources on the GSE and builds on the mechanism of aligning the interest of shareholders with managers. It further provides implications for the development of the capital market in Ghana and argues that further research should be carried out using other country data to confirm or contradict our findings   Key words: Corporate disclosure, transparency, cash holdings, emerging market, Ghana.

Determinants of Cash holding in German Market

Cash is usually known as the blood of any business entity that is why it is very important policy matter in the modern corporate financial decision and policy matters. An appropriate level of cash is required within the firm for the good and smooth operations of any sort of business entity. This research report investigates the determinants of cash holding in non-financial firms of Germany across different firm sizes and industries. Furthermore the data set for the period of 2000 to 2010 for the firm size, log of total assets, EBIT, Capital expenditure percentage of sales, working capital, liquidity (current ratio), and leverage has been taken to study the impact of these on level of corporate cash holdings. It is shown that cash holdings must be analysed from a dynamic point of view: A strong empirical support was found for the hypothesis of implicit cash targets. Financial determinants influence the corporate cash holdings, but it's not clear which model, the transaction cost model or the managerial opportunism, thesis supports best the empirical findings. The findings of this study are consistent with the predictions of the trade-off theory, pecking order theory, and agency cost theory. The result gave strong evidence that firm size, working capital, and leverage significantly affect the cash holdings decisions of non-financial firms and that are in conformity with the existing literature on the determinants of corporate cash holdings.

Cash Holdings and CEO Turnover

The determinants of firm level cash holdings are well documented, yet relatively less is known about the influence of CEO characteristics on 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. Cash savings come mainly from increased efficiency in the management of net working capital, as opposed to asset sales or reductions in investment. Lastly, the marginal value of cash does not decrease following the turnover, indicating that the increase in cash holdings is not a result of agency problems between the new manager and shareholders.

Evidence on the Determinants of Cash Holdings By Private and Public Companies

We examine the determinants of cash holdings in private and public companies. Using a sample of more than 280,000 U.K. private firms and 970,000 firm-year observations from the 1994-2010 period we show that cash holdings in private firms support both the trade-off theory and the financing hierarchy theory. The results indicate that cash holdings in private firms decrease significantly with size, net working capital and leverage. The evidence also shows that private firms that pay dividends hold more cash and that cash holdings increase significantly with capital expenditures and cash flow volatility. We also examine the relation between cash holdings and ownership and management structures in private firms. We find that firms with less severe agency problems hold significantly more cash than private firms associated with more severe agency problems. We also present results for publicly traded companies. We find that both private and public firms adjust cash holdings to target levels but adjustments tend to be greater for private companies.

Window Dressing in Corporate Cash Holdings: Evidence from Quarterly Financial Statements

This paper finds a strong evidence of upward window dressing in cash holdings by U.S. industrial firms during the fourth fiscal quarter. The window dressing behavior is robust to several controls such as cash holdings determinants, firm characteristics, and a December year-end dummy. Further cross-sectional analysis reveals that the upward window dressing in corporate cash holdings towards the fiscal year-end is sensitive to firm size and, to some extent, the level of information asymmetry. Moreover, the results show that firm manipulate discretionary accruals to dress up the fourth quarter cash holdings. Finally, the analysis illustrates that the fourth quarter window dressing in cash holdings may provide favourable credit terms for issuing short-term debt. Overall, the study confirms that managers of industrial firms manipulate financial information systematically to report higher than actual cash holdings during the fourth fiscal quarter.

The determinants of cash holdings in private family firms

AbstractWe present empirical evidence on traditional and family firm–specific determinants of cash holdings in the under‐researched context of private family firms. We examine, from an agency theoretic perspective, how and to what extent the relation between family firm management and cash holdings is moderated by the ownership structure. Results reveal that descendant CEOs appear to maintain higher cash holdings than founder CEOs. This effect seems to be stronger if there is a low ownership dispersion. Moreover, outside CEOs maintain higher cash holdings than family CEOs if the family firm is owned by a single owner.