Cash Levels Research Articles

Corporate governance and cash holdings: A quantile regression approach

This study investigates the role of ownership and control structure of firms when determining their cash holdings and focuses mainly on the association between excess control rights and cash holdings. Using a sample of Taiwanese publicly listed companies from 1997 to 2009, this study shows that the relationship between excess control rights and cash holdings depends on each firm's characteristics in terms of quantile regression. Fewer excess control rights affect cash holdings positively in low cash holding firms but negatively in high cash holding firms. Additional analysis reveals that when a family member serves as the CEO in low cash holding firms, the amount of cash holding is greater than if the CEO is an outsider. However, family members holding the position of CEO affect cash holdings negatively in high cash holding firms. These results suggest that firms with less cash holdings stockpile more cash reserves to take advantage of investment opportunities. The objective of corporate governance for firms with more cash reserves is to ensure that firms decrease levels of cash to avoid agency problems.

Determinants of Corporate Cash Policy: Insights from Private Firms

We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.

PENGKONSTRUKSIAN KURVA YIELD DENGAN METODE NELSON SIEGEL SVENSSON (Studi Kasus Data Obligasi Pemerintah)

Bond is one of fixed-income investment instruments because of their income granted a return for investor based on the interest rates predetermined. The level of cash that returns to the investors and factor which must be considered by investor before invest bond is called yield. The term stucture of interest rates gives the relationship between the yield on an investment and the time to maturity of the investment. The graphic depiction of the relationship between the yield on bonds in the different maturities is known as the yield curve. The yield curve contruction of the government bond with bond ID is FR (Fixed Rate) by Nelson Siegel Svensson models on the trade date 16 on February 2011. The data is obtained from Indonesian Stock Exchange (IDX). The parameter estimation is done by ordinary least square. The optimation function for its estimation is done by Nelder Mead simplex. Yield curve on day 16 depicted upward sloping. Keywords : Government Bond, Yield Curve, Fixed Rate, Nelson Siegel Svensson, Nelder Mead Simplex

Assessing Managerial Power Theory

Although studies about the determinants of CEO compensation are ubiquitous, the balance of evidence for one of the more controversial theoretical approaches, managerial power theory, remains inconclusive. The authors provide a meta-analysis of 219 U.S.-based studies, focusing on the relationships between indicators of managerial power and levels of CEO compensation and CEO pay-performance sensitivities. The results indicate that managerial power theory is well equipped for predicting core compensation variables such as total cash and total compensation but less so for predicting the sensitivity of pay to performance. In most situations where CEOs are expected to have power over the pay setting process, they receive significantly higher levels of total cash and total compensation. In contrast, where boards are expected to have more power, CEOs receive lower total cash and total compensation. In addition, powerful directors also appear to be able to establish tighter links between CEO compensation and firm performance and can accomplish this even in the face of powerful CEOs. The authors discuss the implications for theory and research regarding the determinants of executive compensation.

Cash Holdings, Corporate Governance and Acquirer Returns

We examine the interactive nature of antitakeover provisions (ATPs) with firm characteristics and governance environments in explaining the cross-section of bidder announcement returns. Using completed deals for the period of 1996-2006, we document 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 product market competition is weak and/or public pension fund ownership is low. By contrast, when product market competition is intense and/or public pension fund ownership is high, ATPs have no impact on bidder returns. The presence of 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 find consistent evidence.

SMEs’ capital structure behavior on cash holdings to Korean financial crisis: The evidence from emerging market

This paper explores the leverage impact on corporate cash holdings using SME data listed in the emerging Korean KOSPI market between 1980 and 2008. It is well known that SMEs are characterized by relatively high asymmetric information and agency cost. We focus on the relationship between cash holdings and leverage. We hypothesize that the impact of leverage on cash holdings is likely to be non-monotonic for listed Korean SMEs, as asserted by Guney et al. (2007). As firms’ leverage acts as a proxy for their ability to issue debt, we would expect to see a negative relation as a substitution effect between leverage and cash holdings. However, we might also expect firms to save larger cash levels as their leverage increases in order to minimize their risk of experiencing financial distress, costly bankruptcies, and the threat of default. Thus, we would expect to see a positive relation as a precautionary effect between leverage and cash holdings. We did not find this relationship during an analysis of a full period; we found only a substitution effect during the Korean financial crisis, whereas we found both the substitution and precautionary effects after the Korean financial crisis. Our findings provide robust support for the view that a significant non-monotonic relationship between leverage and cash holdings emerged only after the Korean financial crisis. It is clear, therefore, that SMEs tend to have a significant precautionary motivation for saving cash after suffering a financial shock. We make several discoveries by applying the Partial Adjustment Model (PAD) to market frictions such as adjustment and transaction costs. This application produces similar conclusions regarding the relationship between leverage and cash holdings. However, we can distinguish the results of the dynamic cash model from those of the static model as we analyze the relationship between cash holdings and size variable. This finding about SMEs suggests that, while large firms hold lower levels of cash, there may be other factors affecting the way in which the size of a firm exerted influence on the financial policy of its cash holding after the Korean financial crisis. Key words: Cash holdings, leverage, asymmetric information, agency cost, substitution effect, precautionary effect.

Corporate cash holding and firm value

This study contrasts the effect of cash holding on firm value for a sample of US industrial firms during 2001–2007. The study tests empirically for the existence of an optimal cash level that maximizes firm value. Second, the study analyses whether or not deviations from the optimum cash level reduce firm value. The results show a concave relation between cash holding and firm value, verifying the existence of an optimum level of cash holding. Additionally consistent with the initial analysis, deviations above and below optimal cash holding decreases the firm value.

An Examination of the Free Cash Flow and Information/Signaling Hypotheses Using Unexpected Dividend Changes Inferred from Option and Stock Prices: The Case of Regular Dividend Increases

This paper measures unexpected dividend changes in testing the free cash flow and information/signaling hypotheses using the Bar–Yosef/Sarig method. The empirical findings reveal the following: (i) The association between announcement period abnormal returns and the cash level is significantly positive for low q firms; (ii) The positive association between announcement period, abnormal returns, and the cash level is stronger in low q than in high q firms for most regressions; (iii) Low q firms reduce their capital and research and development (R&D) expenditures during the four fiscal years following dividend increase announcements. Our results are consistent with the free cash flow hypothesis.

The Effect of Demand for Shares on the Timing and Underpricing of Seasoned Equity Offerings

Despite high levels of asymmetry of information, firms that issue SEOs within a year of their IPO (follow-on SEOs) are able to offer shares at a lower discount compared to more mature firms. We provide evidence that this seeming contradiction can be explained by a very high degree of demand for the follow-on offering. We find that the likelihood of issuing a follow-on SEO is significantly related to the level of institutional demand and that discounts are lower for follow-on SEOs in which institutional demand is high. We also consider the joint effect of cash holdings and follow-on SEOs on discounts, since firms that have recently gone public tend to hold high levels of cash. Underpricing is higher for firms with elevated pre-offer levels of cash, which is consistent with market timing predictions. However, this relation is mitigated for both follow-on SEOs and issues that also have high share demand.

The Valuation of Pro-Forma Free Cash Flows in an IPO Setting: The Case of Canadian Income Trusts

The Canadian income trust organizational structure allows operating entities to pass on free-cash flows to unit-holders in a tax-efficient manner. This paper examines the market valuation of pro forma disclosures of free cash flows, known as distributable cash, disclosed by these income trusts in IPO prospectuses and annual reports and assesses whether the market fixates inappropriately on this measure.We collect distributable cash disclosures for a sample of business trusts that undertook initial public offerings on the Toronto Stock Exchange between 1997 and 2006.We have several key findings. First, when focusing on a single performance measure, we find that distributable cash is a better predictor of IPO date trading values than is net income. Following the IPO distributable cash continues to be the best predictor of market value, out-performing both net income and dividends. Second, based on a Mishkin test, we find that the market does not fixate on distributable cash levels. Finally, though distributable cash does a good job of explaining price levels, we show it is incomplete. Special items, a component of net income that is excluded from distributable cash, is statistically significant when added to distributable cash. Similarly, net income can be very useful as a performance measure provided the researcher uses a more complex valuation mapping such as a returns format. In total, the results suggest that, for the flow-through entities we examine, distributable cash is a simple and useful disclosure that appears to be treated by the market as close to permanent earnings as defined in Ohlson (2009). The market is sophisticated in incorporating this disclosure. However, the superiority of one measure over another depends on the taste of the researcher for model complexity.

Partial adjustment toward optimal cash holding levels

Recognizing that industry and capital market conditions may impede a firm's desire to achieve its targeted cash holding levels, we estimate a dynamic model that allows firms to adjust their cash holding levels over time and find evidence consistent with a trade-off type behavior in cash holding levels. We estimate a partial adjustment model and find that firms rapidly correct any deviation from their targeted cash levels. A typical firm in our sample closes this gap within two years. Inconsistent with the agency view of excess cash holdings, we find that cash holding levels for firms with excess cash persists over time compared to those that have a deficit. We also find that smaller firms typically hold excess cash and are quicker to correct deviations than large firms consistent with the view that it is more costly for financially constrained firms to operate at sub-optimal levels of liquid assets.

Corporate Governance and the Value of Excess Cash Holdings of Large European Firms

AbstractWe examine the relation between the quality of corporate governance and the value of excess cash for large publicly listed European firms from common‐law and civil‐law countries. Besides different law origins, we distinguish different dimensions of corporate governance by using ratings for the quality of Shareholder rights, Takeover defences, Disclosure and Board structure. We find that the value of excess cash is positively related to the Takeover defences score only. This finding is mainly driven by firms from common‐law countries. If we focus on changes in the level of excess cash, we do find significant effects for civil‐law country firms, where the marginal value of €1 of excess cash in a poorly governed firm is only €0.78 while the value is €1.10 for a good governed firm. We furthermore show that the spending of excess cash by poorly governed firms has a negative impact on their operating performance.

Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A

This paper examines firm-level determinants of mature firm exits after economic distress. Using nested logit models and a sample of 6,118 distress-related exits in Belgium, we analyze the type of exit that distressed firms experience. We show that 41% of the firms in our sample exit through a court driven exit procedure (mainly bankruptcy), 44% are voluntarily liquidated and 14% are acquired, merged or split (hereafter M&A). Distressed firm exit follows two distinct stages. First, a firm either decides to exit voluntarily or is forced into bankruptcy, which is the least efficient exit strategy. Compared to bankruptcy, the probability of a voluntary exit increases with higher levels of cash, lower leverage, holding no secured debt and being embedded in a group. If a firm exits voluntarily, it enters a second stage and decides either to exit through voluntary liquidation or through a M&A. Conditional on not going bankrupt, the likelihood of voluntary liquidation compared to M&A increases with higher levels of cash or secured debt, with smaller size and with an absence of group relations. We contribute to the firm exit literature by jointly analyzing three exit types and showing that bankruptcy and voluntary liquidation are fundamentally different exit routes. While voluntary liquidation is an important exit route for distressed firms, most previous studies have failed to distinguish between bankruptcy and liquidation. We hence contribute to the exit literature by showing that bankruptcy, voluntary liquidation and M&A are fundamentally distinct exit routes for distressed firms, driven by different firm level characteristics and following a two-stage process.

REIT Going Private Decisions

Over the recent decade there was a wave of REITs going private, from an average of about three per year to 40 between 2005 and 2007. Standard corporate finance theory posits that firms go private when there is no longer a positive tradeoff between the expected benefits and the costs of being public, and it provides empirical evidence that going private decisions are motivated by potential gains from leverage, tax benefits, and expected improvements in corporate governance. Given the unique institutional environment for the REIT industry, this paper sheds new light on the going-private decision. Specifically, we examine the determinants of the going-private decision and document announcement wealth changes using a sample of 160 REITs from 1985 to 2009. We find firm performance and agency-related factors significantly impact the probability that a REIT announces to go private. We find that the passage of Sarbanes-Oxley and a proxy for differential performance in the private and public markets have no significant impact on the decision. The announcement day abnormal return is almost 12% and the three-day abnormal return is 15%, magnitudes that are both statistically and economically significant. Variations in the market reaction are associated with lower levels of cash and higher stock price volatility. Overall, we document a new set of going-private factors and wealth impacts for the REIT industry that are unique from those of previous corporate finance literature.

Investing in science: securing future prosperity

A meeting concerned with UK science and technology investment was held at Chatham House, London, in November 2010. The UK science and technology research budget has been preserved at a fixed cash level whereas other areas of government face significant reductions in their financial support. This is in marked contrast to some East Asian countries, such as China, where investment in science and technology is increasing. The UK needs to change many aspects of education at school level and beyond to preserve its status as a first rate scientific country. It also has to solve the long-term problem, with some notable exceptions, of being unable to translate basic research discoveries into manufactured products. This article discusses the impact of these issues along with some tentative suggestions on how to improve these, with particular reference to the radiological sciences.

Cash Stockpiles and Investment: Do Cash-Rich Firms Use Cash in Acquisitions?

U.S. firms are hoarding a $2 trillion cash stockpile which many believe will spur acquisition activity. In light of this fact, we examine whether cash-rich firms actually use their cash when making acquisitions. Surprisingly, we show that firms in the top third of cash holdings are 45% more likely to use stock versus cash in acquisitions, vis-a-vis other firms. Additionally, cash-rich firms both make fewer all-cash bids and use a lower proportion of cash in mixed bids. We investigate this phenomenon further and show that cash-rich firms are more likely to use equity as the method of payment when they are overvalued. Moreover, there is no evidence that cash rich firms waste their cash on acquisitions; cash-rich firms that pay with cash actually acquire undervalued firms. Finally, in the post-acquisition period, cash-rich firms that acquire with stock are at least as likely to maintain high levels of excess cash as non-bidder cash-rich firms. Overall, the evidence implies that the link between cash stockpiles and cash acquisitions is not as obvious as commonly believed.

Risk and the Multinational Corporation Revisited: The Case of Natural Disasters and Corporate Cash Holdings

•Natural disasters are major causes of uncertainty. Based on traditional international business and finance theories, we re-examine the relationship between risk and internationalization. We find evidence that diversification helps reduce risk. •We introduce natural disasters to mainstream international finance as a risk factor and show several important findings: firms hoard cash after a natural disaster. Unlike their domestic counterparts, MNCs increase their cash holdings to a lower degree when faced with a disaster. The effect of disaster damage is persistent over time. Finally, disaster damage is not relevant in poor countries. •Firms appear to have a rational reaction to disasters: corporate cash levels are lower in countries with high insurance consumption. Firms hold more cash in countries with greater exposure to natural disasters, but they tend to lower cash holdings in countries with good disaster preparedness programs and/or high insurance consumption. •Our results have important implications for policy makers and academics. Cash hoarding after a disaster, while rational at the firm level could be detrimental for economic recovery. Our study suggests tools for policy makers to control it.

An Examination Of The Effects Of The February, 2001 Crisis (Turkey) On The Performances Of The Low-Q And High-Q Firms

This paper examines the effects of the February 2001 Economic Crisis (Turkey) on the low-Q and high-Q firms. In the study, our sample is composed of the firms that are actively being traded on Istanbul Stock Exchange (ISE) during that time, and is divided into two sub-samples based on their Tobins Q values. As firms with high Tobins Q values are supposed to have lower debt levels we proposed them to be less affected by the crises: their debt repayment commitments are lower, although they are expected to be under the burden of higher interest rates. On the other hand, low-Q firms have incentives to overinvest due to the high levels of available free cash and they may be under the burden of some perquisites expenses. But because of the asset substitution affect, the investments undertaken by low-Q firms are expected to be safer projects while high-Q firms may have undertaken more risky projects. To test our hypothesis that the crisis would affect the low- and high-Q firms to differing extends, we construct the average mean excess returns of both sub-samples and use the Large Sample Test of Hypothesis About a Population Mean method. Our results mainly confirm our expectations: we found that the average mean excess negative returns of high-Q firms were higher than that of low-Q firms during the February 2001 Crisis, indicating that high-Q firms are more riskier in an economic crisis setting than low-Q firms, which in turn implies that the effects of the conflict between equityholders and debtholders dominate the affects of the conflict between managers and the shareholders.

Determinants of Corporate Cash Policy: A Comparison of Public and Private Firms

We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that on average private firms hold less than half as much cash as public firms do. The higher cash holdings of public firms are partially caused by the fact that public firms add more to their cash reserves in a given year, even controlling for a number of spending and savings factors, than do similar private firms. Further, consistent with the presence of financing frictions, we find that private firms adjust much more slowly to their target cash levels when they have a cash deficit than public firms do, and private firms’ cash-to-cash flow sensitivity is higher than that of public firms. Overall, our evidence supports both the agency conflicts and the financing frictions views of corporate cash policy.

Nonprofit Cash Holdings

This study examines the determinants and implications of nonprofit cash holdings. Based on agency theory and traditional literature of cash holdings, the author develop and test a number of predictions about nonprofit cash holdings. Several important findings can be highlighted. Nonprofit cash holdings do not seem to be detrimental to nonprofits; in fact, their levels can be explained with traditional precautionary and speculative motives. Additionally, governance and managerial proxies indicate that nonprofit cash holdings may not be a function of agency problems. Consistent with a harmless interpretation of cash holdings, nonprofits with higher excess cash tend to invest more in land, buildings, and equipment than those that hold less cash. Finally, donors do not penalize organizations that hold high levels of cash.