Lower Cash Research Articles

Cash Holdings and Marginal Value of Cash across Different Age Groups of U.S. Firms

Using a sample of 11,365 unique US firms over the period 1966 to 2021, this study examines the relationship between the age of a firm and its cash holdings. We categorize firms as young, mature, or old based on their age or years of operation. Our results show that firm age is one of the important determinants of cash holdings and that managers adjust cash holdings in response to changing financial needs and risks as firms age. We find that young firms tend to hold higher levels of cash than more established firms and that the marginal value of cash holdings is higher for younger firms. This is consistent with the notion that young firms are more focused on growth and investment and may have limited access to external financial resources. In contrast, mature and old firms tend to hold lower cash levels, possibly due to greater financial stability, increased creditworthiness, and a lower need to manage financial risks. Controlling for significant variables, we confirm our findings with the robustness tests. Taking care of the endogeneity issue, we still can confirm that firm age is negatively significant to the level and the marginal value of cash holdings.

Intellectual capital efficiency, institutional ownership and cash holdings: a cross-country study

PurposeThis study aims to investigate the roles of intellectual capital efficiency and institutional ownership on cash holdings and their speed of adjustment.Design/methodology/approachUsing a sample of 432 firm-year observations of tourism-listed companies, three measures of cash holdings are used as dependent variables and intellectual capital efficiency and institutional ownership as independent variables. The financial data is collected from the S&P Capital IQ database for the period 2015–2020. Two system-generalized methods of moment estimation are used for the robustness checks of the results.FindingsThe study provides evidence that an increase in intellectual capital efficiency in tourism firms results in lower cash holdings. The research findings also report that characteristics such as firm size, age and market-to-book value ratio are associated with cash holdings. Furthermore, institutional ownership in these firms did not affect the cash holdings. The results also confirm the existence of a target cash holding level to which the tourism firms attempt to converge. These results are robust to the alternative proxy of cash holding and endogeneity tests.Research limitations/implicationsThe study uses intellectual capital efficiency measured by the model proposed by Pulic. Alternative measures of intellectual capital can be included in future studies. Future research can also investigate the impact on cash holdings before and during the pandemic for tourism companies. The study is limited to the impact of institutional ownership; thus, research can be extended to consider other types of ownership.Practical implicationsThe findings of this study indicate that tourism companies should take into account the impact of intellectual capital efficiency on their cash holding decisions. The industry uses a specific financial management strategy in light of better efficiency and possibly values the opportunity cost of holding more cash. Additionally, regulators should re-examine the role of institutional ownership in tourism firms, as it was found to have no impact on cash holdings. The regulators may need to consider other factors, such as firm size and age, when developing policies and regulations to ensure that tourism firms have adequate cash holdings.Originality/valueThis study adds to the body of knowledge on the factors that influence cash management and ideal cash levels for the tourism industry. The examination of the effect of intellectual capital on cash holdings is a novel contribution, filling a gap in the existing literature. The findings on the speed of adjustment towards optimal cash holdings also provide support for the trade-off theory.

Does cybersecurity risk stifle corporate innovation activities?

Cybersecurity risk has become a major concern for organizations due to its potential impact on a variety of corporate activities. This paper examines the impact of cybersecurity risk on corporate innovation activities and uncovers two important channels: risk-taking and precautionary savings. Employing textual analysis and machine learning techniques to estimate firms' ex-ante cybersecurity risk for a sample of U.S. listed firms, we show that cybersecurity risk is negatively related to corporate innovation. We address potential endogeneity biases and find the results to remain unchanged. Furthermore, our results are robust to alternative proxies, truncation issues, and external cybersecurity risk. We uncover the mechanisms underlying the main result by showing that the effects are more pronounced for firms with lower tolerance to risk and lower cash savings. Innovations of smaller, financially constrained firms and firms belonging to high cybersecurity risk and technology-intensive industries are affected more.

What Matters for Corporate Cash Holdings Board Governance, Financial Constraints, or Interactions?

Corporate cash holdings have received increased attention from researchers and practitioners as cash management is a crucial task for executives. Holding too much cash can result in low returns and mismanagement by managers. Conversely, holding low cash reserves can lead to missed investment opportunities. The present study examines the relationship between board governance, financial constraints, and corporate cash holdings. The robust fixed-effects method is used in this study to analyze 860 A-listed firms in China from 2005 to 2020. An index is designed to measure board effectiveness, while financial constraints are measured using Z-score, the Kaplan and Zingales index, and the SA index. The major findings document that the financially less constrained firms hold more cash when there is an effective board governance. Furthermore, financially less constrained firms have more robust board governance to minimize the agency concerns of managers and shareholders. This research provides an inference for stockholders’ activism connected to the cash holdings of the financially constrained and less constrained companies. The findings offer useful policy implications for stakeholders to reform contemporary cash holding policies. Specifically, understanding the role of an effective governance system for financially less constrained firms would help minimize the potential agency conflict. JEL Classification: G34, O16, G32, F34

Local product market competition and investment home bias

Local product market competition introduces predation risk, which could lead firms to take advantage of local, non-industry investment options to avoid pressure from their local product market competitors. However, investment within competitive local product markets tends to be inefficient due to difficulties in obtaining information and coordinating actions. This inefficiency could extend to local, non-industry-specific investments, resulting in a negative effect of product market competition on a firm’s response to local, non-industry investment opportunities. Testing these two competing views, we find that firms in competitive local product markets show higher sensitivity to local, non-industry-specific investment signals, and that such sensitivity is associated with an increase in performance and market share. These results hold when addressing the potential endogeneity issue using an exogenous shock to local product market competition, a PSM technique, and an IV estimation. Furthermore, our results show that firms in competitive local product markets are also more likely to make local, non-industry acquisitions. Lastly, our results show that firms in competitive local product markets are more responsive to local, non-industry investment opportunities, primarily when they have low cash holdings, are financially unconstrained, or have little geographical diversification.

The Effect of Political Frictions on the Pricing and Supply of Insurance

Abstract Political frictions significantly affect both pricing and supply in the long-term care insurance (LTCI) market. Comparing the same insurer’s requests submitted for the same policy at the same time to different state regulators, we find that they are 13% more likely to be approved and receive 4% more of the requested amount after an election year. Over time, regulatory pushback on premium increase requests leads to persistently lower cash reserves and increases the probability of company dropout. An insurer who receives one-standard-deviation less of their requested increase is 20% more likely to leave the market next year.

Executive compensation controls and corporate cash holdings.

As a crucial component of internal corporate governance, remuneration controls possess the potential to influence the cash holdings of firms. However, identifying the causal relationship between these controls and such holdings presents a considerable challenge. To address this research gap, this paper leverages the implementation of China's Guidance on Further Regulating the Remuneration Management of Heads of Central Enterprises as a quasi-natural experiment to investigate the relationship between executive remuneration controls and firms' cash holdings, utilizing a double-difference approach. Based on an analysis of a sample of listed companies from 2007-2012, the results indicate that firms subject to regulated executive compensation exhibit lower cash holdings. To ensure the robustness of these findings, various statistical techniques such as parallel trend tests, variable replacement, propensity score matching, and placebo tests were employed. Additionally, a mechanism test was conducted, whereby the mediating effect of executive compensation controls on firms' cash holdings was examined, revealing a reduction in internal agency costs. Finally, the analysis of heterogeneity demonstrated that the impact of executive compensation controls on firms' cash holdings was more pronounced in companies with high-quality internal controls, stronger management oversight, and lower information asymmetry.

Corporate governance, policies, and outcomes: The appointment of military connected boards and sustainability

AbstractThis paper explores whether a military connected board is an effective corporate governance mechanism, leading to sustainable corporate policies and outcomes. Appointing military‐experienced directors could be a firm's good and ethical business strategy if it positively influences firms' decision making process and eventually outcomes. Relying on over 6800 firm‐year observations over the period of 2000–2018 in the Thai stock market, we find military connected boards mis‐utilize firms' resources, representing a weakening governance mechanism―in line with agency cost theory. Specifically, firms with military officials on their boards are highly levered, keep low cash reserves, pay low dividends, but underinvest, and historically underperformed. However, we find a positive relationship between military connected boards and firm value, measured by Tobin's Q, representing potential future growth and supporting resource dependency hypothesis. Although backward‐looking analyses point toward irresponsible and unsustainable corporate policies which ultimately destroy corporate outcomes, forward‐looking evidence sees a good use of military connected board members in bidding on the government's projects.

Asymmetric effect of renewable and non-renewable energy consumptions on corporate cash holdings: new panel data evidence from BRICS economies

PurposeIn the recent wake of environmental sustainability, more attention has been paid to the consumption of specific energy types. However, how the consumption of such energy alternatives influences multiple corporate-level decisions has not yet been well explored in the literature. The current analysis bridges this deficiency in literature by exploring the empirical relationship between energy alternatives and cash holdings.Design/methodology/approachFor empirical analysis, the authors sample the non-financial sector enterprises founded in five BRICS economies and employ the system GMM and fully modified ordinary least square techniques to establish the regression. The selection of econometric techniques is subject to the existence of endogeneity and cointegration.FindingsThe estimated coefficients reveal a significant negative effect of renewable energy (REC) while a significant positive impact of non-renewable energy consumption (FFE) on cash holdings. Referring to low pollution emissions, less operational risk and a cheap source of energy, the more consumption of renewable energy reduces the motives of cash holdings. Primarily, the current analysis advocates an important policy regarding the utilization of renewable energy as industrial fuel inputs because it has a material impact on cash holdings and also ensures environmental sustainability.Practical implicationsThis study has equal policy outputs for industry officials, policy regulators and environmental economists. Corporate managers should do more focus on transforming the energy needs from non-renewable to renewable as such transformation can benefit in terms of both, i.e. environmental sustainability and low cash holdings.Originality/valueContemporary literature mainly highlights the determinants of energy consumption. However, it is less known how the consumption of specific energy sources affects the firm's cash-holding decisions. Thus, this study enriches both energy economics and financial economics literature by offering cutting-edge evidence on the sustainable role of REC in declining cash holdings.

CASH CONVERSION CYCLE AND PROFITABILITY FOOD AND BEVERAGE COMPANIES IN INDONESIA

One measure used to measure the efficiency of working capital is Cash Conversion Cycle (CCC). The cash conversion cycle is a cycle that describes the length of time it takes a company to convert inventory and receivables into cash and pay debts. The lower the cash conversion cycle, the better. This study aims to analyze the relationship between the cash conversion cycle and profitability. The samples in this study were 17 food and beverage companies listed on the Indonesia Stock Exchange for the 2018 to 2022. This research found that there is a negative relationship between the cash conversion cycle and profitability as measured by Return on Assets and Return on Equity. The shorter the inventory conversion period and the receivables collection period and the longer the debt repayment period, the less cash conversion cycle can be. Reduced or lower cash conversion cycles indicate that the company has been able to optimize the use of its working capital so as to increase profitability.

Stock liquidity, cash flow sensitivity and the value of cash

Using a sample of U.S. public firms from 1990 to 2017, we find that firms with higher stock liquidity are associated with lower cash flow sensitivity of cash. An analysis of the market value of cash shows that each additional dollar of cash and investment in non-cash assets is worth significantly more in firms with high stock liquidity than in firms with low stock liquidity. Further analysis indicates that firms with high stock liquidity enjoy higher investment efficiency and invest more in capital expenditure and R&D. The reduction in cash flow sensitivity through improved stock liquidity is more pronounced when firms demonstrate lower financial constraint, information asymmetry and risk, and stronger corporate governance (i.e., fewer agency problems). Overall, these results suggest that stock liquidity reduces information asymmetry and the agency costs of free cash flow, thus contributing to value enhancing investments which improves company valuation.

Enterprise system implementation and cash flow volatility

AbstractThis study investigates the financial and operational implications of enterprise systems (ESs) in corporate risk management. Using matched difference‐in‐differences analyses based on ES implementation events, we document a significant reduction in the volatility of operating cash flows following ES implementations. We further show that ES implementers have better post‐implementation operational efficiency than matched non‐ES firms and better manage sales, costs of sales, working capital, and operating expenses to reduce operating cash flow volatility. Consistent with the benefits of lower cash flow volatility documented in prior literature, we find ES implementers demonstrate higher investment efficiency, lower reliance on external financing, and higher debt capacity post‐ES‐implementation than the matched non‐ES firms. Our study sheds light on the economic benefits of utilizing ESs in corporate risk management and in so doing responds to the paucity of empirical research in this area.

Does Cash Bail Deter Misconduct?

Courts routinely use low cash bail as a financial incentive to ensure released defendants appear in court and abstain from crime. This can create burdens for defendants with little empirical evidence on its efficacy. We exploit a prosecutor-driven reform that led to a sharp reduction in low cash bail and pretrial supervision, with no effect on pretrial detention, to test whether such incentive mechanisms succeed at their intended purpose. We find no evidence that financial collateral has a deterrent effect on failure to appear or pretrial crime. This paper also contributes to the literature on legal actor discretion, showing that nonbinding reforms may have limited impact on jail populations. (JEL K41, K42)

The tax incentives and corporate cash holdings: Evidence from a quasi-natural experiment of an accelerated depreciation tax policy for fixed assets

Based on a quasi-natural experiment of an accelerated depreciation tax policy (ADP) for fixed assets in China, we examine the impact of the ADP on corporate cash holdings. Using a multiperiod difference-in-differences model with a sample of Chinese A-share listed firms from 2008 to 2020, we document that firms subject to the ADP exhibit lower cash holdings compared to firms not affected by the policy. The effect is more pronounced for young firms, profitable firms, and firms with less R&D investment. According to our mechanism analysis, the ADP mitigates a firm's financing constraints and financialization and therefore, a firm does not need as much as cash holdings as they did before the implementation of the ADP. The mechanism test results suggest that the ADP lowers the precautionary and speculative demand for cash. The analysis of economic consequences shows that the reduction of cash holdings significantly enhances firm value. Our research results suggest that the ADP is a good policy for firms.

The generalist CEO pay premium and CEO risk aversion

AbstractWe investigate whether and how managerial risk aversion influences the structuring of the generalist pay premium. We use three candidate variables for managerial risk aversion: the CEO's equity portfolio vega, decision horizon, and wealth. We find that equity‐based pay differs between generalist CEOs (who have broader experience spanning several industries) and non‐generalist CEOs (who tend to have narrower, specialized industry‐specific experience) based on their risk appetite. Further, how the generalist pay premium is structured depends on the risk aversion measure. Because generalist CEOs tend to be better paid than their counterparts, understanding their risk aversion level will help companies improve the structure of these CEOs’ compensation packages, and ultimately those of all CEOs. When vega is the risk aversion measure, CEOs get compensated for bearing risk. However, generalist CEOs with high vegas suffer a “risk discount” in their compensation. These generalist CEOs are associated with lower cash, equity, and total pay. CEOs with longer decision horizons get more equity and less cash, but this structuring does not extend to the generalist CEOs. Finally, wealthier CEOs get more cash and total pay. However, generalist CEOs who are wealthier get less cash pay.

Does Chinese-style margin trading promote the high-quality development of listed companies?

Using the margin trading reform of China's stock market as a quasinatural experiment, this paper explores whether margin trading promotes the high-quality development of listed companies. The results show that total factor productivity (TFP) significantly decreases after listed companies are included in the underlying stocks of margin trading. In addition, the negative impacts are stronger for listed companies with higher financial leverage, lower cash asset holdings, lower shareholdings of financial institution investors, and less attention from securities analysts. Further research shows that the negative impacts of margin trading on TFP are closely related to the deterioration of the information environment and the tightening of financing constraints. When listed companies are included in the underlying stocks of margin trading, they use a lower proportion of their net profit for internal financing (and a higher proportion of their net profit for cash dividends) and significantly reduce external equity financing. The results of this study show that the margin trading reform in China's stock market may inhibit the high-quality development of listed companies to a certain extent.

Judicial system reform and trade credit financing: Evidence from a quasi‐natural experiment

AbstractThis paper examines the impact of judicial system reform on trade credit financing using a quasi‐natural experiment in China. We find that the judicial system reform promotes the trade credit financing. The reform effect is stronger for firms that are non‐state‐owned, advocating trust culture orientation, and with high relationship‐specific investment level, high debt level, and low cash holdings level. Moreover, our results show that the increase in business transaction volume and the improvement of internal control quality are important channels to increase the trade credit financing. The judicial system reform has notably improved the total factor productivity and firm value.

Managerial overconfidence and corporate cash holdings: Evidence from primary and secondary data

The corporate finance literature argues that overconfident managers tend to hold less cash, and this leads to a significant deviation from optimal cash levels. We analyse the impact of executive overconfidence on the corporate cash holdings of listed Vietnamese firms. To quantify managerial overconfidence, a novel core measure used in our analyses is voice pitch, which is obtained from interviews with top-line managers. Other measures of managerial overconfidence are also used to support the results and confirm the validity of the voice pitch measure. Our empirical evidence, with economically significant results, reveals that higher levels of overconfidence amongst managers are associated with lower cash holdings. Surprisingly, the findings show that overconfident managers tend to be associated with a low level of deviation from optimal cash holding levels. In addition, our findings also provide evidence that managerial overconfidence can increase cash levels and deviations from target cash holdings for overinvesting firms.

Cash creates value for supply chain systems, but who appropriates that value?

Cash enables firms to create value in the supply chain by increasing resiliency and facilitating adaptation and reliable fulfillment of contractual obligations, but who appropriates this value? We propose that cash-rich firms gain the bargaining power to appropriate value by obtaining more favorable terms from their trading partners, resulting in higher margins, shorter cash conversion cycles, and, ultimately, higher financial performance. Relational ties with trading partners, however, make firms more accommodating and forbearing, thus attenuating value appropriation by cash-rich firms. We test our hypotheses on a panel-data sample of Japanese keiretsu and non-keiretsu corporations using Hausman-Taylor instrumental variables regression models. The results provide strong support for our prediction that although cash creates value, resulting in higher margins, lower cash cycles, and higher financial performance, a firm’s ability to appropriate the value created by the cash it holds depends on the nature of its relationship with its trade partners.

The effect of China's low carbon city pilot policy on corporate financialization

This paper investigates the effect of China's low-carbon city pilot (LCCP) policy on corporate financialization. We find that the implementation of the LCCP policy increases the level of corporate financialization, with this increase being more pronounced in firms that have lower cash holdings or are non-state-owned enterprises (non-SOEs) than in firms that have higher cash holdings or are SOEs. We also find that compared with firms not holding financial assets, firms holding financial assets can better smooth investment volatility under the influence of the LCCP policy. The asymmetry of this smoothing effect is stronger in firms that exhibit underinvestment than in firms that exhibit overinvestment, which indicates that the primary role of financial assets is to serve as a “reservoir” that buffers the negative effects of fluctuations in their returns caused by policy uncertainty and thereby prevents liquidity risk.