High Cash Holdings Research Articles

Every person has their price? Political corruption and CEO compensation

We provide evidence that local political corruption significantly and positively affects CEO compensation, and we demonstrate that this positive association is contingent on asset shielding mechanisms and corporate governance quality. Specifically, corruption appears to inflate CEO compensation to a greater extent in firms with higher cash holdings, paying out dividends, or absence of operating losses. Additionally, the positive correlation between corruption and CEO compensation is more pronounced in firms with less efficient monitoring. Further analysis reveals that, although higher compensation can enhance firm performance, this positive effect is significantly reduced in firms headquartered in more corrupt areas. These findings strongly support the rent extraction explanation of CEO compensation. Our results are robust across different measures of political corruption, variations in model specifications, and assessments of causality.

Financial decision dynamics: Environmental, social, and governance factors and managerial choices in emerging markets

This study examines the linkage between the ESG performance of firms and managerial decision-making. It uses 8 years of ESG performance data of 110 Indian firms collected from the Thomson Reuters database. The study finds that high ESG performance mitigates a firm’s cost of debt more than equity cost. Furthermore, increases in ESG performance are associated with higher capital expenditures, lower investment cash flow sensitivity, higher cash holdings, and lesser payout of increased cash flows to shareholders. The findings are in sync with the Slack resources view, suggesting that the requirement of financial Slack for ESG-related innovations and risk-bearing is large and impacts the major managerial decisions of firms. While the effects of environmental and social performance on these decisions are similar to that of the composite ESG performance, governance performance shows an independent impact on the payout decisions of firms. The Granger Causality test reveals a bi-directional association between debt issues and ESG performance. The main results obtained from the multiple panel regressions are robust to additional tests involving lead-lag analysis. The overall findings of this study highlight the importance of ESG performance screening in the managerial decision-making process of investors who would not like to risk growth potential for a short-term increase in dividends.

Does culture matter in corporate cash holdings?

AbstractThis paper identifies culture as an important factor affecting corporate cash holdings by using China and its national culture, Confucianism, as the setting. We find that firms located in regions with stronger Confucian culture hold persistently higher levels of cash. We employ an instrumental variable to draw causal inference. Confucian culture strengthens the effect of cash flow risk on cash holdings of financially‐constrained firms, suggesting precautionary motives as the underlying mechanism. We find that the culture effect remains intact after controlling for corporate governance heterogeneity, which rules out the agency motives. Lastly, firms' operating performance indicates that high cash holdings is an efficient outcome.

Explaining bitcoin ownership in Canada: Trends from 2016 to 2021

AbstractThis paper studies the dynamics of bitcoin ownership from 2016 to 2021, using the Bank of Canada's Bitcoin Omnibus Surveys. The estimated rate of bitcoin ownership jumped to 13% in 2021, up from the 5% observed in the previous three years. On one hand, this increase reflected broader economic trends related to increased savings and investment of Canadians during the COVID‐19 pandemic, along with financial technology companies providing accessible and user‐friendly platforms for buying bitcoin. Looking deeper, we use econometric models to quantify several specific ways in which bitcoin became more mainstream as an investment in 2021. Finally, we investigate the high cash holdings of bitcoin owners across time.

Human capital quality and cash holdings

In this paper, we examine whether human capital quality affects firms’ cash holdings. Using a sample of U.S. firms from 1980 to 2022, we find that a one standard deviation increase in human capital quality is associated with an increase of 0.053 in the cash-to-total assets ratio. We also explore two channels—skilled labour risk and agency costs—through which human capital quality affects cash holdings. Further, using the hiring of a chief diversity officer as a proxy for a diverse and inclusive workforce, we find that firms that hire chief diversity officers have higher cash holdings.

Cash is queen? Impact of gender-diverse boards on firms' cash holdings during COVID-19

This study examines the role of gender-diverse boards in preserving cash holdings during crises. Using a sample of UK firms during the COVID-19 period, we find that firms with more female directors had higher cash holdings. This increase in cash reserves is primarily driven by reduced board compensation, reflecting the careful stewardship associated with gender-diverse boards. Interestingly, we find no evidence of female directors reducing acquisition activity or capital expenditures, suggesting that these firms did not compromise on growth prospects while building their cash buffer. Our study underscores the value of gender-diverse boards in navigating firms through crises without sacrificing shareholder value. Our results remain robust even after controlling for endogeneity and alternative estimation techniques. The findings hold significant implications for investors, policymakers, and advocates of gender diversity in boardrooms, emphasizing the financial prudence that gender diversity can bring in crisis management.

Does firm-level teamwork culture affect cash holdings?

PurposePrior literature on the cultural determinants of cash holdings focuses on time-invariant cultural variables measured at the geographical level. These measures of culture do not capture the firm-level variation in corporate culture. Using a validated time-variant measure of firm-level corporate culture, specifically teamwork, we examine the effect of teamwork on a firm's cash holdings.Design/methodology/approachIn this paper, we explore the effect of corporate teamwork culture on firms' cash holdings. Using sudden CEO turnover as an exogenous shock to a firm's teamwork culture, we find teamwork increases cash holdings. Also, we test and find two channels—financial constraint and agency—and two new labour-related channels—human capital quality and labour inefficiency—through which teamwork culture affects cash holdings. Our results are robust to endogeneity tests.FindingsWe find that teamwork increases the cash holdings of firms. We find that a firm with a high teamwork culture has higher cash holdings: an increase of one standard deviation in teamwork leads to a 14.6% rise in the mean cash holdings.Originality/valueTo our knowledge, our study is the first to introduce the firm-level teamwork cultural construct as a determinant of cash holdings.

Trade credit and firm value in business groups: evidence from Korea

ABSTRACT This study examines the relation between trade credit and firm value in the context of business groups (i.e. chaebols). We find that the use of accounts receivable negatively influences firm value, and this negative impact is more pronounced for group-affiliated firms than for stand-alone firms. We further find that the negative moderating role of business groups on trade credit-firm value nexus is stronger for firms with lower product market competition, lower large shareholder ownership, higher cash holdings, and higher financial distress. Our main findings are robust to an endogeneity concern, an alternative proxy for trade credit, and different estimation specifications. Our empirical evidence sheds light on how the use of trade credit can potentially be linked to firm value from the perspective of business groups. Our findings can help stakeholders, including investors and creditors, better understand the trade credit-firm value link in the context of business groups.

Environmental regulations and corporate cash holdings

The impact of environmental regulations on corporate performance and decisions has attracted significant attention from academics, practitioners and policymakers. We extend this line of research to examine the impact of regional environmental regulations on firms’ cash holdings. We find that environmental regulations motivate firms to increase cash holdings. Further analyses reveal that firms increase cash holdings due to having less debt financing, decreased sales and more green innovation, all caused by environmental regulations. Under regulatory pressure, firms operating in more competitive industries, facing more financial constraints, having more environmental expenditure and belonging to the secondary sector tend to hold more cash than other firms, while firms with better CSR performance do not maintain as high cash holdings as their counterparts. We further demonstrate that increased cash holdings caused by the imposition of environmental regulations increase firm value.

Judicial informatization and digital transformation: evidence from the establishment of the internet court

ABSTRACT Based on data of Chinese A-share manufacturing listed companies from 2014–2021, we consider the establishment of Internet Courts (ICs) as a quasi-natural experiment and empirically examine the impact of judicial informatization (JI) on firms’ digital transformation using a double machine learning (DML) approach. Our findings suggest that JI facilitates firms’ digital transformation, while firms’ financing capacity can enhance this positive relationship. Specifically, we find that the impact of JI on digital transformation is more significant for firms that have high cash holdings, are large and mature. Our findings contribute to the understanding of the factors influencing the digital transformation of microenterprises and provide empirical evidence to assess the economic consequences of JI reforms.

Pretending to be sustainable: Is ESG disparity a symptom?

This study investigates a novel dimension of ESG (environmental, social, and governance), namely the degree of inequality in the distribution of a firm’s overall ESG performance across the three pillars. By grounding our arguments on the agency theory, we argue that such a dimension can discern the degree of authenticity of managers’ ESG awareness. A more unequal distribution might be due to a discretionary and self-interested adoption of ESG principles in order to win the favour of key stakeholders. Using a sample of U.S. listed companies, we provide empirical evidence that disparity in ESG scores between pillars detracts value from ESG engagement. Moreover, such a negative moderating effect worsens in companies that are more prone to agency problems (e.g. higher cash holdings), lack ESG-based compensation, have lower leverage, and are more exposed to the investor spotlight (e.g. higher analyst coverage). Overall, our findings suggest the importance of accounting for managerial motivations to engage in ESG and support the idea that a lower perceived authenticity of these programmes results in lower value outcomes.

When it's not personal but positional: The upside of CEO power

AbstractWe examine links between corporate cash holdings and types of CEO power, and how these affect firm performance, using agency and stewardship theories to distinguish two types of CEO power: one attributable to the CEO position, and one attributable to CEO personal characteristics. Measured as indices, we find positive associations with cash holdings for both types of power, individually and in combination, but only positional power with higher cash holdings is positively associated with firm performance. Our findings are shown to be robust and suggest that scrutiny of cash holdings by CEOs with high personal power may be prudent.

Killing Growth: Homicides and Corporate Investment in Brazil

We examine the effects of violent crime on corporate investment and financing decisions of Brazilian firms. Exploring city variation in homicides, we find that an increase in the growth rate of homicides is associated with significantly lower corporate investments, with lower labour investments, and with a higher likelihood of layoffs. Spikes in violent crime are also associated with more conservative financing policies, reflected in higher cash holdings, in lower R&D (research and development) expenditures, and in lower dividend payments. Homicides further affect investment efficiency and financing choices, decoupling investment from debt finance and profitability. Moreover, the negative association between homicides and investment is significantly stronger in smaller firms, which highlights the uneven costs of violent crime in reducing firm growth.

Who Loses Most When Big Banks Suddenly Fail? Evidence from Silicon Valley Bank Collapse

We analyze the market reaction of 137 Silicon Valley Bank (SVB) depositors and 251 SVB borrowers to the bank's collapse. Depositor shares experience a -5.12% abnormal return (AR) on the event date (March 10, 2023), and a -12.38% cumulative abnormal return (CAR) over a 30-day post-event window. More surprisingly, the borrowers also experience a similar event-day AR (-4.16%) and an even worse 30-day post-event CAR (-13.47%). SVB clients have worse CARs if they are smaller, with higher cash holdings, or with lower market-to-book ratios. These results indicate that borrowers appear to suffer more than depositors from SVB's failure.

Multiple directorships of outside directors and firms’ cost behaviour: evidence from Korea

ABSTRACT This study examines how multiple directorships of outside directors are related to firms’ cost behaviour. Results based on a sample of Korean-listed companies from 2011 to 2017 show that the level of cost stickiness is attenuated when outside directors hold multiple directorships. However, multiple directorships do not mitigate the degree of cost stickiness that is associated with managers’ strategic response to expected future sales increase. We find evidence that the degree of cost stickiness of firms with high cash holdings can be attenuated by multiple directorships. These results suggest that outside directors who serve on multiple boards are effective at monitoring cost management of empire-building managers. Further, the level of cost stickiness is not attenuated by outside directors sitting on the boards of multiple subsidiaries within the same business group. These results suggest that outside directors’ business group affiliations undermine their monitoring roles as independent directors. This study is closely related to finance and accounting literature on economic benefits of multiple directorships or board connection. HIGHLIGHTS The level of cost stickiness is negatively associated with multiple directorships of outside directors. -Outside directors holding multiple directorships are effective at monitoring cost decisions. -Outside directors' business group affiliations undermine their monitoring roles.

Digital economy, green technology innovation, and productivity improvement of energy enterprises.

This study aims to address the important question of whether the digital economy can be deeply integrated with the energy sector to break through the resource and environmental constraints and thus enhance the productivity of energy companies. Using a sample of Chinese energy-listed companies, we comprehensively investigate the impact of the digital economy on the productivity of energy firms using the OLS method, mediated effects model, instrumental variables method, and difference-in-differences model. Research shows that the development of digital economy can significantly improve the productivity of energy enterprises. This effect is more obvious in eastern cities, non-resource-based cities, state-owned enterprises, and enterprises with high cash holdings. Green technological innovation in alternative energy production, transportation, and administrative supervision and design is an important channel for improving productivity in the digital economy. Internet development and digital inclusive finance can also improve the productivity of energy enterprises. "National Big Data Pilot Zone" and "Broadband China" pilot cities can play a policy role in improving the productivity of energy enterprises. The findings provide important insights for promoting the integration of the digital revolution with the energy technology revolution and accelerating the green development and digital transformation of the energy sector.

Ownership structure and corporate cash holdings in Jordan: the role of government ownership

ABSTRACT Using a dataset of 107 listed firms in Jordan from 2009 to 2018, we employed the generalized method of moments (GMM) to examine the effect of ownership structure on the level of corporate cash holdings. We found that higher government ownership is associated with higher cash holdings. On the other hand, different forms of ownership, namely block holding and individual and foreign ownership, were found to be insignificant. We further examined why firms in Jordan hold cash, concluding that when the level of government ownership rises, firms do not employ cash reserves for investments nor for dividend payments, which in light of governmental political purposes could be a clear indicator of agency problems.

ESG reputation risks, cash holdings, and payout policies

This paper examines the financial implications of environmental, social, and governance (ESG) reputational risks and evaluates if excessive cash holdings and corporate payout policies can play influential roles in firm valuation by investors. We find empirical evidence suggesting that when ESG reputational risks intensify, investors particularly penalize the stock price of firms with excessive or high cash levels. This effect is particularly pronounced when managers do not employ any form of corporate payout policies. It is observed that cash distributions in the form of dividend payments or share repurchases may help mitigate shareholders’ antipathy to excessive and high cash holdings. Further analysis reveals that investors may view refinancing risks as a positive moderating factor for high levels of cash holdings during negative ESG shocks.

Directors’ and officers’ liability insurance and corporate cash holdings: From principal–principal perspective

AbstractThis study examines the effect of directors’ and officers’ liability insurance (D&O insurance) on corporate cash holdings in China. We propose a collusion theory in which D&O insurance can exacerbate the conflicts of interest between controlling and minority shareholders by shielding directors and officers from shareholder litigation in emerging countries. Consistent with our expectation, we find that insured firms tend to have high cash holdings that are appropriated by both controlling shareholders and directors/officers rather than being invested or paid to shareholders. Moreover, the positive relationship between D&O insurance and cash holdings is more pronounced in firms with high litigation risks, whereas the effect is attenuated in firms with political connections, strong external monitoring mechanisms and strong controlling shareholder power. Compared with uninsured firms, the market discounts the value of cash holdings for insured firms.

Could the simultaneous persistence of greater cash holdings and interest‐bearing debts affect stock price crash risk?

AbstractWe study the impact of a unique financial anomaly—the simultaneous persistence of greater cash holdings and interest‐bearing debts (SP‐GCHID) on stock price. Due to institutional diversity and the nature of transition economies, high cash holdings do not always stem from precautionary motive as usually claimed but can be the result of cash misappropriation and debt manipulation by major shareholders. Analysing data from Chinese listed firms from 2010 to 2018, we find that SP‐GCHID is associated with a higher stock price crash risk (SPCR). It is more evident among firms with major shareholders pledging their shares and firms exposed to more external information monitoring. SP‐GCHID also affects SPCR through increasing real earnings management, further suggesting that major shareholders' misappropriation is the main reason for SP‐GCHID's adverse effect. These findings are also robust in a range of endogenous tests. To our knowledge, this study is the first to explore the economic consequences of SP‐GCHID.