Cash Levels Research Articles

How Does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions?

We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90th percentile) of pension deficit, investment increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm’s target cash level. We repeat our main analysis for the United Kingdom (UK) and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.

The underlying drivers and future development of air cargo

Air cargo plays a crucial role in the air transport chain and in the globalized economy. As for other modes of transport, the demand for air cargo is a derived demand. Previous studies showed that the main determinants of air cargo demand are merchandise trade and the share of manufactures in merchandise trade. This paper aims to fill a gap in the existing literature by additionally taking the influence of air freight yields and oil prices into account when modelling the global air cargo development. Furthermore, it provides an insight into the future development of air cargo. Forecasts until 2023 are made based on a number of scenarios for the main determinants of air cargo demand. Moreover, an insight is provided into the current air cargo market, including traffic levels and different types of actors and traffic flows. The results are useful not only for academics but also for industry stakeholders for which air cargo is an important contributor to profit and/or cash levels.

The Demand for Cash by Corporations

The interest in the study of behaviour of the transactions demand for cash by corporations has been stimulated by Baumol (1952), Tobin (1956), and Friedman (1959). Baumol and Tobin suggested that there are economies of scale in cash holdings and transactions elasticity of cash balances is 0.5. Friedman’s results showed a permanent income elasticity of 1.8. The other later studies on demand for cash by firms either supported Baumol and Tobin or Friedman. Among others, Frazer (1964), Nadiri (1969), and Coates (1976) supported Baumol and Tobin while Meltzer (1963 June, 1963 August), Whalen (1965), De Allessi (1966), and Vogel and Maddala (1967) supported Friedman. Those who supported Baumol and Tobin found that under moderately restrictive assumptions optimal transactions cash balances very less than in proportion to sales and those who supported Friedman found that the elasticity of cash with respect to sales is about or more than unity.There is also no unanimous finding as regards to the effect of interest rate on demand for cash. Among others, Selden (1961), De Allessi, Nadiri, and Coates showed the statistically significant negative relationship between interest rates and demand for cash while Friedman did not find the same. It all shows that there is no unanimous finding with respect to the economies of scale in cash holdings, and the interest cost effect on demand for cash. In order to validate one view or the other, no study has so far been conducted in the context of Nepal. This paper therefore tests out the models that will either support or reject the Baumol-Tobin hypothesis.Section I of this paper describes the models that attempt to explain firm’s demand for cash and the nature and sources of data used in the statistical analysis. The regression results are presented and interpreted in Section II. Finally, the empirical findings are summarised and the conclusions are indicated in Section III.The major conclusion indicated by this paper is the empirical evidence in support of the presence of the economies of scale in cash holdings, significant effect of interest cost on investment in cash, and the slow speed of adjustment between actual and desired level of cash.

Managerial Ownership and Corporate Cash Holdings: Insights from an Emerging Market

1. IntroductionThe reason of holding corporate cash is explained by four motives in economics and finance literature: the transaction motive, the precautionary motive, the tax motive and the agency motive (Bates, Khale, and Stulz, 2009). Keynes (1936) determines two main benefits for holding cash. First, the firm reduces transaction costs to raise funds and also it does not have to liquidate assets in order to make payments. This is called transaction cost motive (Opler, Pinkowitz, Stulz and Williamson, 1999). According to precautionary motive, in case of cash flow shortfalls a firm might not invest in profitable projects if it does not have liquid assets. As a result, a firm holds cash in order to diminish the costs of financial distress (Opler et al., 1999). Third, Foley, Hartzell, Titman and Twite (2007) report that the firms which incur tax consequences related with repatriating foreign earnings hold more cash. This is explained by tax motive (Bates et al., 2009).It is assumed that when agency problems between managers and shareholders are greater, cash is worth less (Pinkowitz, Stulz and Williamson, 2006). In his free cash flow theory, Jensen (1986) states that managers have an incentive to hold large amount of cash for their own objectives rather than shareholders'. By doing so, they increase the assets under their control and gain optional power over the firm's investment decisions (Ferreira and Vilela, 2004). However, it is known that when managers have ownership, they aim to maximise firm value rather than using the firm's resources for their own benefits. Thus, managerial ownership aligns the interests of managers and shareholders and this is called as managerial alignment effect. In addition, when managerial ownership continues to increase managers can not be monitored by shareholders and it is resulted in entrenchment of managers. In this case, managers use the firm's resources for their own private benefits rather than the shareholders'. This is called as managerial entrenchment effect. Following the alignment and entrenchment effects, this study examines whether managerial ownership is effective on cash holding decisions of Turkish firms. To examine the impact of managerial alignment and managerial entrenchment on the cash holdings, the ownership level by managers (MO) and quadratic form of this variable (MO2) are used, respectively. Quadratic form of managerial ownership is a proxy for high level of ownership and thus managerial entrenchment in line with the existing literature (Marchica, 2005). When cash holding ratio is used as a dependent variable, a negative coefficient for MO and a positive coefficient for MO2 are expected. Since high cash holdings cause agency problems of free cash flow (Dittmar et al., 2003), managers should choose less level of cash holdings to behave in line with shareholders' interests. Thus, a negative coefficient for MO variable is expected. In addition, at higher levels of managerial ownership, managers might hold higher level of cash for their own private benefits at the expense of shareholders'. Therefore, a positive coefficient for MO2 variable is expected.So far several studies have already analysed the firm specific characteristics that determine the cash holding preferences of firms. Ozkan and Ozkan (2004) examine the impact of managerial ownership besides firm specific characteristics on cash holding preferences of UK firms for the period between 1984 and 1999. Furthermore, although Uyar and Kuzey (2014) have examined the firm specific characteristics that affect cash holding choices of Turkish firms, they have not investigated whether managerial ownership is effective on this choice. As an emerging market Turkish market has different characteristics. Emerging markets have weaker regulatory environment, weak corporate governance and thus low information disclosure level which results in information asymmetry problem between managers and shareholders. As a result, the firms operate in emerging markets come across with costly external financing (Uyar and Kuzey, 2014). …

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.

Family control and adjustment to the optimal level of cash holding

Given the predominance of family control in most European corporations, understanding how this type of ownership affects firms’ cash holding policy is important. The literature has yet to address this subject satisfactorily; therefore, we outline a way to model how family firms define their cash policy, specifically, the way in which they adjust their cash holding to an optimal level. We base our analysis on trade-off theory and the precautionary motive for holding cash. Our empirical results show that family firms adjust their cash holding level more aggressively than non-family firms, and, therefore, family firms are capable of achieving optimal cash holding faster and more efficiently than non-family firms. Further, we find that family firms have a heterogeneous cash policy; in particular, young family firms, financially constrained family firms, and family firms that operate in countries with strong investor protection adjust their cash holding more aggressively.

Trade Credit, Risk Sharing, and Inventory Financing Portfolios

As an integrated part of a supply contract, trade credit has intrinsic connections with supply chain coordination and inventory management. Using a model that explicitly captures the interaction of firms' operations decisions, financial constraints, and multiple external financing channels (bank loans and trade credit), this paper attempts to develop a deeper understanding of the risk-sharing role of trade credit, that is, trade credit enhances supply chain efficiency by allowing the retailer to partially share the demand risk with the supplier. Within this role, in equilibrium, trade credit is an indispensable external source for inventory financing, even when the supplier is at a clearly disadvantageous position in managing default than a bank. Specifically, the equilibrium trade credit contract is net terms when the retailer's financial status is relatively strong. Accordingly, trade credit is the only external source the retailer uses to finance inventory. By contrast, if the retailer's cash level is low, the supplier offers two-part terms, inducing the retailer to finance inventory with a portfolio of trade credit and bank loans. Further, a deeper early-payment discount is offered when the the supplier is relatively less efficient in recovering defaulted trade credit, or the retailer has stronger market power. Trade credit allows the supplier to take advantage of the retailer's financial weakness, yet it may also benefit both parties when retailer's cash is reasonably high. Finally, using a sample of firm-level data on US-based retailers, we empirically observe the inventory financing pattern that is consistent with what our model predicts.

CASH INFLOWS AND BUBBLES IN ASSET MARKETS WITH CONSTANT FUNDAMENTAL VALUES

Previous experimental research on asset markets has reported that the level of cash available to traders does not affect asset prices when fundamentals follow a time trajectory that is constant over time. This contrasts with other research indicating that greater cash levels increase prices when fundamental values are decreasing over time. We report a new experiment in which we show that greater initial cash levels are indeed associated with higher prices when fundamental values are constant over time. Thus, high cash levels will lead to bubbles, if the cash is introduced before the market opens. Our results reconcile the two previous sets of findings. (JEL C90, D03, G02, G12)

Are U.S. Companies Really Holding That Much Cash—And If So, Why?

Non‐financial S&P 500 companies are now estimated to hold a total of $2.1 trillion of “cash,” a figure that is larger than the annual GDP of all but eight countries. In this report, J.P. Morgan's Corporate Finance Advisory team notes that while many observers have attributed the buildup to offshore cash growth alone, onshore cash levels are also up significantly.To be sure, the companies that have shown the greatest increases also tend to be highly successful, with strong cash flow and business performance. And the managers of such companies tend to prefer to retain much if not most of this cash to take advantage of investment opportunities and to maintain the flexibility to respond to the next economic downturn. Also adding to the cash build‐ups, the executives of large MNCs with significant overseas cash holdings typically try to avoid the higher tax bill triggered by repatriating funds to the U.S.Nevertheless, investors continue to expect growth and high returns on capital; and corporate distributions of capital in the form of dividends and stock buybacks can play an important role in encouraging companies to operate efficiently. While pursuing both of these goals—preservation of enough cash to weather downturns and invest in all positive‐NPV projects, and commitment to paying out excess capital—boards and senior decision makers should continuously reexamine their cash holdings and capital allocation policies to ensure they are appropriate not only for today's environment, but throughout the economic cycle.

Adjustment behavior of corporate cash holdings: the China experience

ABSTRACTUsing a panel of 1478 Chinese listed firms over the period 1998–2010, we examine the behavior of corporate cash holdings. Consistent with the trade-off theory, we document that Chinese firms tend to actively manage their cash balances toward a target level. We also observe a considerable heterogeneity in adjustment speeds of cash holdings across firms, due to the presence of different adjustment costs. Specifically, firms with a high level of excess cash, and firms that actively manage their cash balances through investment, dividend payments, and debt issuance, all display higher adjustment speeds. Finally, the institutional setting does not significantly affect adjustment speeds.

Corporate Social Responsibility and Firm Financial Performance: The Mediating Role of Productivity

This study treats firm productivity as an accumulation of productive intangibles and posits that stakeholder engagement associated with better corporate social performance helps develop such intangibles. We hypothesize that because shareholders factor improved productive efficiency into stock price, productivity mediates the relationship between corporate social and financial performance. Furthermore, we argue that key stakeholders’ social considerations are more valuable for firms with higher levels of discretionary cash and income stream uncertainty. Therefore, we hypothesize that those two contingencies moderate the mediated process of corporate social performance with financial performance. Our analysis, based on a comprehensive longitudinal dataset of the U.S. manufacturing firms from 1992 to 2009, lends strong support for these hypotheses. In short, this paper uncovers a productivity-based, context-dependent mechanism underlying the relationship between corporate social performance and financial performance.

Suboptimal financial policies and executive ownership in the UK: evidence from a pre-crisis

Purpose The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low leverage and investigate how executive ownership contributes to this decision. Design/methodology/approach Firms following this policy are identified both by using a fixed classification approach and the analysis of the distribution of cash and leverage. Logit analysis is then used to estimate the probability of adopting the policy as a function of executive ownership. Findings Extreme financial policies are suboptimal as firms adopting these policies tend to undershoot (overshoot) their target leverage (cash holdings) ratios. The impact of the executive ownership on the probability of adopting this policy is U-shaped, in line with the alignment–entrenchment hypothesis. Practical implications Despite the substantial presence of non-executive directors in the boards and a significant amount of shareholdings by executive directors, the firms under analysis have adopted suboptimal financial policies possibly because poorly governed or because executive ownership is the range where entrenchment is feasible. Originality/value This is the first attempt at recognising policies of high cash and low leverage as being explicitly interdependent. It is also the first study focussing on the UK, a country of interest, because ownership structure is relatively dispersed. Moreover, instead of choosing fixed threshold levels of the variable in defining the extreme financial policy, this paper proposes the analysis of the distribution of cash holdings and leverage and accounts for target levels of cash and leverage.

Behavior of family firms in financial crisis: cash extraction or financial support?

In this study we show that family owners of public corporations have greater incentive to preserve the continuity of the firms during financial crisis relative to short-term oriented parties in widely held public corporations. In this regard, we show that during financial crisis family firms report higher performance, experience more financial support from their shareholders, report lower investment cuts, greater level of cash and have lower leverage ratios, relative to non-family firms. These findings are in line with predictions of socioemotional wealth, because show that family owners have greater incentive to retain control over the firm and to preserve the continuity of their firms during financial crisis relative to short-term oriented parties.

Financing constraints in some selected manufacturing firms: An application of stochastic frontier approach

Stochastic Frontier Approach (SFA) provides both cross-sectional and inter-temporal comparisons of the effects of financing constraints. SFA besides inferring the strength of financing constraints based on the sign and significance of cash flow variable, measures the constraints for each individual firm and at each point in time. It measures directly not only the marginal impact of firm characteristics, such as size & leverage on financial constraint but also at different levels of firm characteristics in a continuum, enabling the firm to decide to either a required minimum or maximum level of cash holding to significantly reduce the financing constraint. SFA used in this study asserts that financing constraints have a symmetric effect on a frictionless level of investment forcing the realized investment to be lower than the frictionless outcome. Therefore, SFA helps to estimate this unobserved investment frontier and any discrepancy of actual investment from the frontier due to financial factors. Closer the actual investment to the frontier, more investment efficiency gain a firm enjoys. So, the error term in regression model is a combination of two parts: (i) two sided noise terms and (ii) one sided (non-negative) technical inefficiency term. SFA estimates financially constrained investment by taking cognizance of modeling one sided deviation from the investment frontier as a function of firm characteristics (such as cash flow, leverage ratio, size and retention ratio of firms). Financing constraints are identified by imposing one-sided distributional assumption on the effect of financing constraints. We examine the financial constraint of some listed firms in Bangladesh following the SFA approach and find that they are under severe financial constraint. The estimated investment efficiency index (IEI) demonstrates a loss of almost 80% of the rate of investment due to financing constraints. The effects of internal financing and external financing on firms’ investment activities are different. It is found that increase in international financing (cash flow) can ease the financing constraints in addition to reduce the uncertainty of the company’s follow-up financing. However, using external financing, firm is likely to increase the uncertainty of future financing. These results suggest that firms in Bangladesh should rely more on internal financing to secure investment opportunities and improve the investment efficiency.

Cash holding adjustments and managerial entrenchment

We find that, on average, firms close 31% of their gap between target and actual cash ratio each year. The adjustment speed is generally swifter if the actual cash ratio exceeds the target ratio, possibly because it is cheaper to disgorge cash than it is to raise it. But as firms become more insulated from the threat of takeovers, they decelerate their cash adjustment at high cash ratios. This evidence suggests that self-interested managers are reluctant to disburse excess cash, and they will allow cash levels to remain high unless the firms are subject to external pressure.

A State-of-the-Art Review of Corporate Cash Holding Research

This review provides several contributions to current research on the determinants of the corporate cash level and its effects on company value. First, the extensive theoretical basis of the corporate cash policy is disentangled. Respective empirical studies consider only a subset of the total theoretical framework. It is therefore valuable to establish an overview of the entire set of theories and to discuss their connections and overlap. I distinguish three theories that stem from capital structure research. These are the trade-off theory, the pecking-order theory and the FCF-hypothesis. Besides, four cash holding-specific theories, namely the liquidity constraints theory, the defense against hostile takeovers theory, the hedging perspective and the costly contracting theory, are regarded. The current trend of investigating cash holdings and the diversity of the associated theories result in a wide set of heterogeneous studies. Thus, the second contribution of this review is to identify the most common proxies used in empirical research, aggregate them into general categories of determinants and compare their predicted influence according to different theories. In sum, 12 general determinants, such as firm size, growth opportunities, leverage, liquidity substitutes and corporate governance, are found to influence corporate cash holdings. A third contribution is provided by establishing a comprehensive review of the actual empirical influence of these determinants and comparing it to their predicted theoretical association.

A study on the algorithm of cash flow forecasting model in the planning stage of a construction project

Recently, due to the global liquidity crisis, construction companies are in bad condition financially. However, by monitoring their cash flows and setting up measures to avoid a liquidity crisis, in a proactive and timely manner, construction companies can manage themselves out of the crisis. This study suggests an algorithm of modeling future cash flow, to be used in the planning stages of projects of construction companies, in order to effectively manage liquidity. Also an algorithm which calculates the optimal cash level by considering elements such as time lags, cost categories and the weights of the cost categories to earned value and budget in the planning stage of a construction project. The algorithm also suggests a forecast of cash flow by comparing the variables of cash-in and cash-out, the output of which is derived through simulations made between such elements as billing time and time lag. Case studies regarding the application of the cash flow forecasting algorithm are also presented. This paper aims to provide a solution for any expected liquidity problems and the implementation of a measure to forecast an adequate cash flow level for construction companies.

Cash holdings, corporate governance, and acquirer returns

The wealth effect of limiting shareholder rights via anti-takeover provisions(ATPs) is a contentious issue. By taking the differential effect hypothesis perspective, our study aims to provide additional evidence about the relation between ATPs and acquisition performance. We examine the interaction of antitakeover provisions (ATPs) with firm characteristics and governance environment in explaining the cross-section of bidder announcement returns. Using a sample of 3,340 completed acquisitions by 1,217 firms during 1996–2006, we test the association between ATPs, firm characteristics, and governance environments with bidder returns. We find that ATPs hurt acquisition performance only when acquirers hold a high level of excess cash. Similarly, ATPs are associated with lower bidder returns only when industry competition is weak and public pension fund ownership is low as well. By contrast, when industry competition is intense and/or public pension fund ownership is high, ATPs do not hurt bidder returns. The complementarity among ATPs, excess cash, industry competition, and public pension fund ownership suggests that ATPs per se do not necessarily result in value-destroying acquisitions for all firms. We address the endogeneity issue of unknown variables by using a proxy for firm prestige and draw the same conclusions.

Cash Management in Nepalese Manufacturing Enterprises

A firm that requires external financing can rely on either debt or equity, but both have an asymmetric information problem which may prevent obtaining financing. In the case of debt financing, the higher the level of informational asymmetry between the firm and the lender, the more difficult it will be for the lender to ascertain the firm's credit quality. In some cases, identifying a firm's quality may be so difficult that the lender may simply ration credit. Because of this asymmetry in lending and the possibility of credit rationing by banks, firms may decide to hold high levels of cash so they can take advantage of positive net present value (NPV) projects even when credit is tight. However, if a firm holds cash, it should not need as much bank financing as it otherwise would. Thus the bank may incur a cost by encouraging cash holdings, namely the loss of potential loans to those firms. Hence, Cash management is the process whereby the cash inflows and outflows are controlled so that current obligations will be met in time and any excess cash will earn income. Specifically, it aims at determining the level of cash holdings by Nepalese manufacturing enterprises. With this in mind, samples of Nepalese manufacturing firms have been used to conduct a study with secondary data. First, regression model is used to test for the existence of an optimal cash holding in this study. The study based on twelve manufacturing enterprises covering the period 1999-2012. The study is reveals that cash holdings are positively affected by the investment opportunity set and cash flows while negatively affected by asset’s liquidity, interest rate, leverage and size in Nepalese manufacturing enterprises.The Journal of Development and Administrative Studies, Vol. 22, No. 1-2, pp. 1-14, 2014

A single-period inventory and payment model with partial trade credit

In this paper, we consider the ordering and payment issues for a retailer facing stochastic demand. We assume that the retailer can enjoy the partial trade credit from his supplier and borrow money from bank as well if needed, and he can also earn return by investing his superfluous on-hand cash (if any). The retailer’s objective is to maximize the expected cash level at the end of the selling period. We formulate the model of this problem by taking initial inventory and capital levels as the two-dimensional state. First, given the exogenous fraction of immediate payment, we show that unlike the critical fractile solution the retailer’s optimal ordering strategy is a two-threshold policy, which is independent of the retailer’s initial inventory level and capital level. Second, we consider an extensive model where the fraction of immediate payment is decided by the retailer. We employ the sequential optimization procedure to solve the extensive problem, and present the structure of the retailer’s optimal policies under different partial-trade-credit penalty rates. Numerical experiments show that if the fraction of immediate payment is exogenous, both partial trade credit and loan opportunity are detrimental to the capital-constrained retailer in many cases, although they can stimulate the retailer to order more.