Cash Levels Research Articles

CEO gender and risk aversion: Further evidence using the composition of firm’s cash

Recent studies suggest that the conventional measure of cash holdings used to capture managerial risk-aversion may be inadequate. Using a new measure of physical cash, which adequately captures managerial risk-aversion, we deduce that female CEOs exhibit risk-aversion not only by maintaining higher physical cash levels but also by adopting risk-reducing policies. These risk-averse policies may be detrimental for some shareholders (despite evidence that female executives reduce agency conflicts) and they may impact the demand for female CEOs in the CEO labor markets. Our results are robust and lend support to the contention that female risk-aversion exists even beyond the “glass-ceiling”.

The impact of the global financial crisis on corporate cash holdings: Evidence from Eastern European countries

This study investigates the impact of the global financial crisis on the determinants of corporate cash holdings and adjustments towards target cash levels using a sample of Eastern European firms. Employing panel fixed effects and GMM estimations, the results reveal that firm-level determinants of cash holdings significantly differ for pre- and post-crisis periods. Moreover, we find significantly lower adjustment speed to attain the optimal cash level in the post-crisis period. Our results are robust to correction for endogeneity. These results hold important implications for Eastern European firms, which are significantly afflicted by the global financial crisis in terms of liquidity shortage and limited financial flexibility.

US experience with futures transaction taxes

AbstractThe transaction tax on futures reduced trading volume during the 1920s and 1930s but had no apparent effect on volatility or open interest. The relative magnitude of the tax was highest for intermediaries and appears to have substantially reduced intra‐day trading, but it did not dramatically affect hedging activity or the level of cash or futures prices. Pit traders were particularly distressed by a 400% increase in the tax rate in 1932 and effectively widened spreads by avoiding trades at the minimum price increment. This doubling of the minimum tick size was formally implemented in exchange rules 1 year later.

Factors affecting Cash Holding Choice Chosen by the Finance Manager: Evidence from the manufacturing Industry of Pakistan

The purpose of this research is to identify the factors that influence cash-holding choices in Pakistan's food business so that appropriate recommendations may be made. The State Bank of Pakistan gathered data from 39 food companies from 2013 to 2020 for the research. We applied static panel data analysis techniques to the inference’s output by utilizing correlation analysis, descriptive statistics, and a pooled ordinary least square regression model to investigate specific firms. Cash flow, leverage, and liquidity ratio adversely affected cash holdings; the research found. Profitability and cash holdings are strongly correlated. Finally, dividend policy and cash holding showed minimal correlation. This study has helped management make sensible cash-holding selections. Food companies should maintain their cash levels at optimum levels to enhance their profitability.

Operational financial management model to improve the profitability of the manufacturing sector. Lycras Manía Case / Modelo de gestão financeira operacional para melhorar a rentabilidade do setor manufatureiro. Caso Lycras Manía

This degree work consists of designing a management model and analyzing its effect on profitability. The investigation problem was identified as inadequate handling of financial information. For which a financial management model will be designed to improve the profitability of the manufacturing sector. In this way, it seeks to optimally use the company's resources and obtain profitability according to the sector in which it is developed. The research will be carried out through a mixed, non-experimental approach, the population corresponds to the main related parties of the Lycras Manía company and will use techniques and tools such as the survey, the interview, the structured questionnaire, and semi-structured, where the inadequate handling of financial information was evidenced; which was causing financial losses. After applying the vertical and horizontal analysis to the financial and income statements, it was determined that there are deficiencies in the inventory account, affecting its cash levels. Therefore, the development of the operational financial management model allowed to help the manager, providing him with truthful information for optimal decision-making, to know the real profitability of the company, ensuring its business progress.

Accounting conservatism and corporate cash levels: Empirical evidence from Latin America

AbstractResearch Question/IssuesThe aim of this research is to shed light on the role accounting conservatism plays in the determination of firms' cash levels. Previous literature suggests that conservatism is a governance mechanism that can alleviate agency problems associated with managers' investment decisions. Hence, we hypothesize that strong conservatism limits managers' ability to expend cash to benefit themselves. For that, we used an unbalanced panel data of firms from Latin America (Argentina, Brazil, Chile, Mexico, and Peru) with data available from 2000 to 2018.Research Findings/InsightsOur results are, for the most part, consistent with our theoretical predictions. Indeed, we find strong and robust evidence that Latin American firms with more conservative accounting policies have higher cash holdings as a result of a reduction in cash misappropriation. These results are robust to alternative measures of conservatism, after controlling for other factors associated with timely loss recognition, for country fixed effects and after a battery of robustness checks.Theoretical/Academic ImplicationsOur analyses suggest that increased conservatism has the potential to bring real economic benefits to organizations, serving as an efficient mechanism that reduces agency costs regarding cash management by inducing a more efficient use of cash holdings. Therefore, we contribute to the international literature on conservatism, cash holdings, and corporate governance by demonstrating the importance of conservatism in firms' decisions on how cash is employed. These findings are particularly interesting because cash expropriation can have a devastating impact on shareholder wealth.Practitioner/Policy ImplicationsGiven the ongoing debate about whether neutrality, as opposed to conservatism, is a desirable feature in financial reports, by documenting how conservatism reduces agency problems related to cash management, we also provide practical implications for accounting standard‐setters.

The effects of cash-holding motivation on cash management dynamics

The two main motivations for having precautionary cash holdings are to cover potential operating losses and to fund investments. A firm’s cash-holding levels may appear to be similar under these two motivations; however, a firm’s cash-management dynamics can vary significantly depending on which of the two motivations is dominant. In this study, we investigate cash-adjustment speed when the actual cash levels deviate from the target cash levels. We confirm that, in general, cash-adjustment speed is faster when actual cash levels are above the target than when they are below the target; however, we also find that this speed asymmetry is more significant for firms with high operating-loss-driven (OLD) holdings than for firms with investment-driven (ID) holdings. In addition, we find that firms with high ID holdings adjust cash faster than firms with low ID holdings, regardless of cash-adjustment direction. These differences in speed imply that firms’ use of external capital can play a major role in their cash adjustment. High OLD firms are less likely than low OLD firms to use external capital to adjust cash levels up. This pattern stands in stark contrast to the pattern characterizing firms with different ID holdings, as high ID firms are more likely than low ID firms to use external capital, especially equity, to adjust cash levels up. We propose, therefore, that cash-holding motivation affects cash-management dynamics.

Foreign Cash, Repatriation, and Credit Ratings: Evidence from U.S. Multinationals

ABSTRACT U.S. multinationals hold record-high foreign cash levels and commit not to repatriate foreign cash “in the foreseeable future” to qualify for deferring tax. We argue that such commitments reveal firms' private information of short-term financial health and thus are a positive factor in credit risk assessments. Using a sample of listed U.S. multinationals in 2009–2016, we document a positive correlation between foreign cash holdings and credit ratings, confirming that rating agencies positively perceive foreign cash holdings. We further find that the positive correlation is stronger in firms with low repatriation costs, in firms that operate in fewer foreign countries, and in firms with poorer financial reporting quality. Our results still hold when applying different identification strategies, reducing the likelihood that our results are purely driven by endogeneity bias.

Collective bargaining power and corporate cash policy

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

Cash Holding and Firm Value in the Presence of Managerial Optimism

Cash holding is important for Chinese manufacturing firms coping with the increasing costs of financing and tough economic conditions. This study examines the impact of cash holding on the firm value of Chinese manufacturing businesses. We found evidence that a non-linear relationship exists between cash holding and firm value in these companies. The study reveals that a higher level of cash holding in financially constrained firms negatively affects the firm value, while unconstrained firms with a less cash holding level have a better firm value. Finally, this research is enriched by implementing the novel measure of managerial optimism. Revealed is the interactive role of cash holding and optimism and how they affect firm value. The study concludes that managerial optimism influences a firm’s cash holding decisions, and this is more costly for unconstrained firms.

Corporate Governance's Policy on the Impact of Cash Holding in Indonesia

The Asian Financial Crisis in 1997 and various other scandals in large companies in Indonesia led to the emergence of good corporate governance (GCG). Regulators on the capital markets understand that good corporate governance promotes transparency and improves the quality of financial reporting, including cash management, responsibly. Furthermore, high cash levels lead managers to misuse the fund for personal gain, because the assets under their supervision increase thereby. This research analyzes the effect of corporate governance, such as board size, and independence on cash holding in Indonesia. Data were obtained from 373 firms in seven industries publicly tabulated on Indonesia Stock Exchanges (IDX) from 2008-2017 and 2,742 firm-year observations. The obtained data were analyzed using Common, Fixed, and Random Effects Models. The result showed that the total number of the board of directors, is positively and significantly proportional to Board Size thereby increasing the company holds cash. Meanwhile, the other corporate governance variable, known as Board Independence, is insignificant in any three models. The result also showed positive coefficients of board size on cash holding (CASH) in companies with and without CEO duality. The result further showed that the independent board had a significant and negative impact on cash holding (CASH), which is more pronounced in companies with CEO duality and used to strengthen corporate governance. The results have specific policy implications like the importance of corporate governance, in particular the role of the Board of Directors in the effective supervision of managers and transparency of enterprises.

Do macroeconomic conditions affect corporate cash holdings and cash adjustment dynamics? Evidence from GCC countries

PurposeThis study aims to investigate the influence of macroeconomic conditions on corporate cash holdings in terms of their influence on the level of cash and the speed of adjustment of cash to target levels in the Gulf Cooperation Council countries (GCC).Design/methodology/approachThe study employs both static and dynamic regression analyses considering a sample of 2,878 firm-year observations drawn from stock markets in GCC countries over the 2010–2018 period.FindingsConsistent with the precautionary motive, the results show that GCC firms tend to accumulate cash reserves in weak economic periods. Evidence also reveals that the estimated adjustment coefficients from dynamic panel models show that GCC firms adjust more slowly toward their target cash ratio in periods of unfavorable economic conditions.Practical implicationsThis study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering financial constraints imposed by macroeconomic conditions. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of macroeconomic factors on firm's cash holding decision. Therefore, in an effort to increase the supply of external financing available to firms, policymakers may devise investment friendly environment by controlling macroeconomic factors.Originality/valueThis paper offers some insights on the macro determinants of cash holdings by investigating emerging economies. It explores the role of macroeconomic conditions on corporate cash holdings in terms of their influence on the costs of external funds and financial constraints.

Economic policy uncertainty, value of cash and financial crisis

PurposeThis paper investigates the effect of economic policy uncertainty on value of cash before and after the global financial crisis.Design/methodology/approachWe investigate the relationship between economic policy uncertainty and value of excess cash based on the valuation model of Fama and French (1998). Baker et al. (2016) news-based index (BBD index) is employed to calculate measures of economic policy uncertainty. Our research sample includes 103,474 observations from 11,000 firms across 19 countries over the period 2004–2016.FindingsWe find that economic policy uncertainty is negatively “positively” related to value of cash in the pre-crisis “post-crisis” period. Moreover, we also document that the positive effect of economic policy uncertainty in the post-crisis period is stronger in financially constrained firms.Originality/valueWhile prior studies find a relationship between economic policy uncertainty and cash levels or the effect of firm-level uncertainty on value of cash, this paper shows how economic policy uncertainty as an institutional environment factor affects value of cash. Moreover, it documents that economic policy uncertainty has opposite effects on value of cash before and after the global financial crisis.

Corporate cash holdings and firm life cycle: evidence from China

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

Is cash the panacea of the COVID-19 pandemic: Evidence from corporate performance

This study investigates the impact of COVID-19 crisis on corporate investment and financing policies. Using a difference-in-difference approach, I find while firms suffer from a real negative shock from the pandemic on average, firms with an abundant cash reserve prior to the crisis outperform firms without. Consistent with the precautionary motive behind corporate cash holdings, this paper demonstrates the effect of cash holdings is meaningful to mitigate adverse effect of the aggregate market. My finding also highlights the difficulty in estimating the optimal cash level when rare market condition is considered.

A novel intelligent system for securing cash levels using Markov random fields

The maintenance of cash levels under certain security thresholds is key for the health of the banking sector. In this paper, the monitoring process of branch network cash levels is performed using a single intelligent system which should provide an alert when there are cash shortages at any point of the network. Such an integral solution would provide a unified insight that guarantees that branches with similar cash features are secured as a whole. That is to say, a triggered alarm at a specific branch would indicate that attention must also be paid to similar (in-cash-feature) branches. The system also incorporates a (complementary) specific treatment for individual branches. The Early Warning System for securing cash levels presented in this paper (cash level EWS) is deliberately free of local demographic specifications, thereby overcoming the current lack of worldwide definitions for local demographics. This aspect would be particularly valuable for banking institutions with branch networks all over the world. A further benefit is the cost reductions that are a result of replacing several approaches with a single global one. Instead of local demographic parameters, a solid theoretical model based on Markov random fields (MRFs) has been developed. The use of MRFs means a reduction in the amount of information required. This would mean a higher processing speed as well as a significant reduction in the amount of storage capacity required. To the best of the author's knowledge, this is the first time that MRFs have been applied to cash monitoring.

Corporate debt and cash decisions: A nonlinear panel data analysis

This paper investigates firms’ decisions regarding their debt and cash holdings based on their access costs when the interest rate changes. We find that for most of the firms the two items keep changing in the same direction. By the panel smooth transition regression (PSTR) model and impact response analysis, we observe that firms may adjust their financing decisions between the two when the interest rate drops significantly and suddenly, or when the real interest rate becomes negative. In particular, we observe that during the 2008 financial crisis, the lower interest rates caused firms to maintain higher levels of cash and only adjusted their debt temporarily. However, when interest rates were close to zero after the crisis, firms instead increased their debt to deal with the economic uncertainties. Finally, the financially distressed firms make very different financing decisions with the healthy firms when the interest rate changes.

Moderating Role of Financial Policies on the Relationship between Tax Aggressiveness and Cash Holding

Research aims: This study aims to examine and analyze the effect of tax aggressiveness on cash holding, and financial policies (leverage, capital intensity, inventory intensity) can moderate tax aggressiveness on cash holding.Design/Methodology/Approach: The population in this study was manufacturing companies listed on the Indonesia Stock Exchange for the 2016-2017 period. The sample selected in this study was 106 companies that met the sample criteria. The research data were analyzed using simple regression analysis and multiple regression analysis.Research findings: The results of this study indicated that tax aggressiveness had a negative effect on cash holding, leverage had a significant negative effect in moderating the effect of tax aggressiveness on cash holding, the capital intensity had a significant positive effect in moderating the effect of tax aggressiveness on cash holding and inventory intensity had a positive significant effect in moderating the effect of tax aggressiveness on cash holding.Theoretical contribution/Originality: The inconsistency of previous studies regarding tax aggressiveness towards cash holding. This inconsistency is an important matter for further investigation, one of which is through the use of moderating variables that aim to measure strength. Therefore, this study correlates financial policies, which are the policy of leverage, capital intensity, and inventory intensity in companies conducting tax aggressiveness which determines the level of cash holding as a source of the company’s fund. There is hardly any research that used leverage, capital intensity, and inventory intensity as moderating variables, particularly capital intensity and inventory intensity.Practitioner/Policy implication: This research is potentially relevant to academics, researchers, and management. By examining the factors that affect the level of cash holding given the role of financial policy, this study reveals the way for further investigation of this topic with a set of micro and macro variables. This study provides insight into the principles of financial policy in moderating corporate tax aggressiveness to influence cash holding decisions.

The supply chain effects on order strategy of cross-shareholdings

ABSTRACT This study examines the joint impact of the vertical cross-shareholdings and external financing, including trade credit and bank loans, on the order strategy of a capital-constrained retailer. We set the target retailer and his supplier, which are connected with vertical cross-shareholdings, in the extended Cournot and Stackelberg game. The capital-constrained retailer could raise external financing when he has exhausted his own cash. Besides, the retailer may be faced with the random shock result from the other business. We use optimal response function to model how the capital-constrained retailer determines his order quantity under cross-shareholdings in response to different market conditions (such as his own cash level and other competitor’s order strategy). We find that, the retailer orders more under cross-shareholdings if the retailer is well-funded with his own cash or external financing, resulting in a win-win situation for the supplier and retailer. However, if the retailer has run out of all his cash and credit, the cross-shareholdings have no effect on the retailer’s order strategy. Thus, it helps the capital-constrained retailer to acquire competitive advantage that he could be well-funded with external financing under cross-shareholdings.

Excessive Cash Holding of Jiuguijiu Enterprise from the Perspective of Agency Theory

The cash level of 300 Constituent companies in 2019 is about 13.73%, while that of the liquor industry in the same period is 34.27%. From the perspective of agency theory, this paper studies the phenomenon of excess cash holding in liquor industry, selects Jiuguijiu liquor as a case of the study, analyzes the phenomenon of excess cash holding in alcoholic liquor issuance, and puts forward corresponding reasonable Suggestions.