Excess Cash Research Articles

Effects of ESG on the relationship between ownership concentration and cash holdings

This paper examined the impact of ownership concentration on cash-holding levels, including 4832 Chinese-listed companies. This study employed the Fixed Effects Model and the Generalized Method of Moments for quantitative analysis. This study shows a positive relationship between ownership concentration and cash holdings. Furthermore, ESG can mitigate the direct correlation between ownership concentration and corporate cash holdings. Finally, the impact described above is particularly noticeable for non-state-owned enterprises. In summary, the empirical findings offer a new analytical perspective on the cash-holding decisions of corporations in the Chinese capital market. Furthermore, this study illustrates the importance of ESG in corporate development to mitigate ownership concentration and excess cash holdings. As a result, the findings show that non-financial reporting, such as ESG disclosure, can reduce agency issues, making more accurate assessments of enterprise performance.

Initial public offering over‐issuance and a firm's acquisition behavior: Evidence from China

AbstractWe analyze the relation between initial public offering (IPO) over‐issuance and a firm's subsequent acquisition decisions. We find that newly listed firms are more likely to engage in merge & acquisitions (M&As) and initiate more and larger‐sized M&As after raising more excess cash in their IPO. Additionally, this IPO over‐issuance is negatively associated with the newly listed firm's post‐acquisition stock performance. Moreover, Type I (principal‐agent) and Type II (principal‐principal) agency problems explain those relations. The negative relation between IPO over‐issuance and stock performance is exacerbated for companies that have made large and industry‐diversifying M&As. Further analyses reveal that acquirers who raised more excess cash in their IPO prefer to pay for their M&As entirely in cash.

Cash management practices and financial performance of livestock marketing cooperative societies in Marsabit County, Kenya

An objective evaluation of the performance of livestock cooperative societies is imperative in order to ascertain whether they fully reward members for the use of their equity fund. The evaluation of agricultural cooperatives using the conventional measures of financial performance like return on asset, return on equity, return on operating equity net margins on sales etc do no yield unequivocal results. Livestock marketing cooperatives societies in Marsabit County have continuously used these conventional measures giving mixed results but failing to indicate whether they create value for member producers. The objective of this study therefore sought to establish the effect of cash management practices on the performance of livestock marketing cooperative societies in Marsabit County. The key theories anchoring the study are; Keynesian theory of money, free cash flow theory and stakeholder theory. The current study adopted quantitative research design. The target population was twelve livestock marketing cooperative societies in Marsabit County that have been operational in the period 2019-2023. The unit of observation was the 110 employees in the finance departments. The study used stratified random sampling technique to arrive at a sample size of 86.. The study utilized both primary and secondary data where primary data was obtained from questionnaires that was presented to respondents and secondary data collection tool was used to obtain secondary data from audited financial reports accessible from society’s offices and ministry of cooperatives and micro-small and medium enterprises development. Diagnostic tests including multicollinearity test, normality test and reliability were conducted to confirm the model fitness. Data was analyzed using descriptive and regression analysis. The regression results showed that periodic cash plan (p=0.003, <0.05), investing of surplus cash (p=0.19, <0.05), managing cash flows (p=0.00, <0.05) had positive statistically significant effect on financial performance. Bank credit line had positive effect on financial performance even though the change was not significant. The study therefore recommends that managers of Marsabit county livestock marketing cooperative societies should enhance effective use and preparation of cash budgets and consistent investment of surplus cash. Further, there should be more decentralization of receipts and application of accounting packages. For policy, the study recommends that policy makers and regulators should concentrate on creating regulations that will allow marketing societies to thrive through provision of appropriate infrastructure for wider market.

Share Repurchases, Undervaluation, and Corporate Social Responsibility

This study examines how firms’ socially responsible behavior relates to the timing of their share repurchases, considering share mispricing and the resulting wealth transfer between sellers and ongoing shareholders. We hypothesize that firms with a stronger commitment to societal goals prioritize the interests of all stakeholders more equally than those with a weaker commitment. Therefore, their managers are less likely to take advantage of the wealth transfer from selling to ongoing shareholders, which occurs when the firm is undervalued. Our results show that firms with higher corporate social responsibility (CSR) engagement, ceteris paribus, announce repurchases during periods of lower undervaluation. Additional analyses show that this effect is more pronounced when investor protection is stronger at the country level. Moreover, higher institutional ownership increases the relevance of undervaluation in buyback decisions and the distribution of excess cash is a relatively more important reason for share repurchases when firms display higher CSR engagement. Overall, our findings demonstrate that firms that generally act in a socially responsible manner also refrain from exploiting sellers for the benefit of ongoing investors. JEL classification: G15, G35, M14

Economic Policy Choices and Economic Growth of Nigeria: Lessons from the Asian Pacific

This study examined the effect of economic policy choices on the growth of Nigeria with specific reference to the Asian Pacific from 1994 to 2022 (i.e. 29 years). Specifically, the study covered three (3) variables. The three economic policy variables are broad money supply, total trade and government revenue. The three economic policy variables accounted for monetary, trade and fiscal policy measures. Meanwhile, the economic growth proxy is considered to be real gross domestic product (RGDP). Data were retrieved from the Central Bank of Nigeria Statistical Bulletin, 2022. The robust regression analysis was suitable for the study. The study confirmed that the broad money supply negatively affects economic growth. However, total trade and government revenue positively affected economic growth. Overall, the study concludes that economic policy choices have a mixed effect on the growth of the Nigerian economy. As such, the Nigerian government should use its monetary policy tools to curb excess cash from circulation. Further, efforts should be made to reduce some trade barriers that mitigate successful trading in Nigeria. Lastly, the Nigerian government should reappraise the country's current trade policies, as this may be the main reason the Nigerian economy is still underdeveloped.

Cash-rich seasoned equity issuers

We document that a substantial fraction of seasoned equity issuers have large pre-offering excess cash holdings. Cash-rich seasoned equity issuers are not easily reconcilable with the traditional pecking order theory on security choice. We examine the role of market timing, agency costs, precautionary motives, repatriation taxes, catering incentives, real options, and negative cash flows in driving seasoned equity offerings (SEOs) by cash-rich firms. We find that cash-rich equity issuers are more overvalued, use the SEO proceeds more opportunistically, and have a worse post-SEO operating and long-term stock price performance than non-cash-rich issuers. However, we do not detect differences in SEO announcement returns between cash-rich and non-cash-rich issuers, suggesting investors underweight firms’ excess cash holdings when assessing an SEO announcement. Overall, our findings predominantly support a market timing motive for SEOs by cash-rich issuers, while other explanations receive mixed to no support. Our results are robust to alternative empirical specifications.

Empowerment or ornament? Gender diversity’s impact on cash holdings amid quota enforcement in an emerging market

PurposeThis study examines the impact of female directors on cash holdings in Egyptian listed firms, particularly in light of Decree 123/2019, which mandates female board representation. This study aims to determine if female directors mitigate agency conflicts related to cash holdings and how these dynamics shift post-quota implementation.Design/methodology/approachUsing a panel fixed-effects model, the research analyzes 1,563 firm-year observations from 223 non-financial Egyptian firms listed on the EGX between 2014 and 2022. The robustness of the findings is tested through additional analyses using alternative proxies for cash holdings, different sample periods and a two-stage least squares approach to address endogeneity concerns.FindingsThis study finds a significant negative association between female directors and cash holdings, suggesting that female board members may promote more conservative cash management practices. However, this relationship weakens post-quota implementation, becoming statistically insignificant. This implies that while quotas increase female representation, they do not necessarily enhance corporate governance effectiveness regarding cash management. The pre-quota positive link between female directors and excess cash holdings also becomes insignificant post-quota.Research limitations/implicationsThe study focuses on female directors’ impact on cash holdings, excluding potential effects on other board subcommittees or functions. It does not capture long-term benefits of increased female representation, which may emerge as the pool of qualified female directors grows. Future research should explore broader implications of gender diversity guidelines and other diversity dimensions across various corporate governance aspects and institutional contexts.Originality/valueThis research provides empirical evidence from an emerging market context on the understudied impact of gender diversity on cash holdings. It critically evaluates the unintended consequences of mandatory gender quotas, highlighting the complexity of regulatory interventions in corporate governance. The study stresses the need for policymakers to address factors limiting the effectiveness of such quotas and to consider potential suboptimal outcomes when increasing female board representation without a corresponding increase in the supply of qualified female directors.

The joint effect of earnings management and efficiency of cash management on firms’ financial well-being: evidence from Egypt

Purpose This study aims to investigate the association between earnings management and the efficiency of cash management as well as the extent to which this relationship affects a firm’s financial well-being (FWB). Design/methodology/approach Using fixed-effects models and quarterly financial statements of 178 nonfinancial firms, this study analyzes 3,376 firm-quarter observations listed on the Egyptian stock market from 2005 to 2019. Findings The empirical findings suggest that optimal cash holdings and cash holding excess increase with lower real earnings management (REM) of operating activities or higher accrual earnings management (AEM). This relationship positively impacts firms’ FWB but is negatively influenced by REM. Research limitations/implications This study’s findings have two key implications for standards regulators and decision-makers. First, the study reveals the link between opportunistic earnings management and cash management, emphasizing the need for stricter oversight in corporate governance to prevent risky long-term decisions. Furthermore, these findings suggest that regulators, specifically in emerging markets, should proactively develop policies to limit earnings management. Second, this study demonstrates how accounting discretion affects both earnings management and short-term working capital management, underscoring the potential erosion of stakeholders’ confidence when financial statements are misleading. Originality/value This study examines the impact of sales manipulation and overproduction on cash holdings. To the best of the author’s knowledge, this is also the first study to explore how managerial discretion over both earnings and excess cash holdings influences a firm’s FWB. This study provides new empirical evidence of the joint effects of managerial opportunism in earnings and cash management on a firm’s financial health.

Macroeconomic conditions, cash holdings, and financial constraints in restaurant firms

Firms with higher cash holding levels can undertake investment projects and pay off their obligations without any financial difficulties. However, unused excess cash could be detrimental to firm value because unutilized cash value could significantly depreciate over time. Thus, this paper aims to examine the extent to which macroeconomic factors affect restaurant firms’ cash holdings. We further examine the extent to which the level of financial restraints affects the link between macroeconomic factors and firms’ cash holdings in the US restaurant corporations. The results showed that interest rates affect restaurant firms’ cash holdings, while other macroeconomic factors do not.

Do Long-Term Institutional Shareholders Always Vote in Favour of Board Recommendations? The Moderating Effect of Cash Holdings

This article aims to examine the voting behaviour of long-term institutional shareholders towards board recommendations on management proposals and resolutions and how the potential agency costs could moderate such voting behaviour. This study is conducted using all corporate capital proposals put to vote by management during the annual general meetings (AGM) of publicly listed firms on the London Stock Exchange over a period of 17 years from 2000 to 2016. Building on agency theory and the concept of the monitoring function of institutional shareholders, this study finds that long-term institutional shareholders do support board recommendations on management proposals, but potential agency concerns linked to excess cash holding can negatively moderate this relationship. Additional analysis reveals that this moderating effect is observed only for management proposals related to cash inflows, specifically after the 2007–2009 financial crisis. This study highlights the importance of long-term institutional shareholders actively monitoring firms’ cash holdings and using voting to address agency concerns while advising corporate managers to optimise cash management and stay attuned to shareholder preferences. For policymakers, the research suggests promoting transparency in corporate governance and strengthening shareholder engagement to reduce agency problems and improve governance. Several robustness tests are conducted, and the results support our predictions.

The Impact of Intellectual Capital, Capital Structure, and Free Cash Flow on Firm Value

This study seeks to provide empirical evidence on the influence of intellectual capital, capital structure, and free cash flow on firm value, using company size as a control variable. The research focuses on companies in the property and real estate sector listed on the Indonesia Stock Exchange (IDX) from 2020 to 2022. A purposive sampling method was employed, yielding a sample of 66 companies with a total of 198 observations. Data analysis was conducted through multiple linear regression, utilizing SPSS software. The results indicate that intellectual capital exerts a positive and significant effect on firm value, suggesting that firms that effectively manage their intellectual resources enhance their market value. In contrast, capital structure shows no significant relationship with firm value, implying that variations in debt-to-equity ratios do not substantially influence the market valuation of companies in this sector. Furthermore, free cash flow was found to have a negative and significant impact on firm value, which may reflect agency problems where excess cash leads to inefficient investments that detract from shareholder value.

Does managerial market timing with stock repurchases exist in stock market?: Evidence from Thailand

This study examines the presence of managerial market timing with stock repurchases in the Stock Exchange of Thailand (SET) from 2008 to 2017. We find that managerial market timing with stock repurchases does not exist in an emerging market (namely, Thailand) supporting the theory of pseudo market timing, as the probability of stock repurchases is not related to undervalued stocks. However, there are other motivations for conducting stock repurchases rather than managerial market timing including the distribution of excessive cash flow due to high operating income and no good future investment opportunity, and the change of capital structure because of underleverage. Our findings are supportive to the free cash flow, capital market allocation, and trade-off theories. In addition, we also find that timing firms tend to suffer from the deterioration of Tobin q ratio, market value added (MVA) and economic value added (EVA), and they do not rebalance their capital structure after this event.

Why Do Companies Share Buybacks? Evidence from the UK

We examine the key drivers behind management decisions on share repurchase from various theoretical perspectives, including the free cash flow theory and the signaling theory/hypothesis. Specifically, we investigate the relationship between share repurchase and three key drivers: surplus cash, undervaluation, and leverage, along with several control variables. Using a sample of UK-listed non-financial companies from 2012 to 2022, we apply logistic regression, standard OLS regression, and Tobit regression to identify the factors influencing share repurchase. Our findings reveal that firms repurchase shares to distribute cash to shareholders with surplus cash and Surplus investing cash flow. This study also finds that undervalued smaller firms with lower market-to-book ratios and lower leverage are more likely to repurchase shares. Our study highlights the key factors motivating companies’ share repurchases, such as undervaluation, surplus cash, and leverage, examined from various theoretical perspectives, including the free cash flow theory and signaling theory. Focusing on the UK context, as well as adding a new angle in regard to applying logistic regression, standard OLS regression, and Tobit regression in combination, this research contributes to the existing body of knowledge in corporate finance. The outcome of the study has plausible implications for financial managers and investors in selecting stocks. Its practical implications will help investors gain a better understanding of the factors and forces influencing share repurchase decisions.

Break the Eclectic Choice: Can Green Credit Policy Restraint the Polluting Firms’ Financialization? Evidence From China

The innovative use of green credit policy for financial regulation in environmental governance is a significant effort to balance environmental preservation and economic growth. The objective of this paper is to study the effect of green credit on the polluting firms’ eclectic business strategy, which is financialization, and the related mechanisms. Based on the sample of Chinese public firms from 2008 to 2019, we employ the DID model constructed by the Green Credit Guidelines promulgated in 2012 to investigate the causality between green credit policy and firms’ financialization. The results of theoretical and empirical studies show that the green credit policy helps to mitigate the financialization of heavy polluters compared to non-heavily polluting firms, thereby realizing the optimal allocation of financial resources. The mechanism test indicates that green credit policy has a suppressive effect on the financialization level of heavily polluting firms, mainly through promoting green innovation while reducing excess cash and banks’ credit willingness. The heterogeneity test further indicates that green credit policy is more pronounced in SOEs, strong environmental regulation enforcement regions and higher market competition industries. Our study confirms the effectiveness of green credit policies from the perspective of firms’ business strategy, which not only provides empirical evidence for the evaluation of green credit policy effects, but also sheds lights on the green transformation and sustainable development of heavily polluting firms.

Managerial Overconfidence and Cash Holding in China: The Moderating Effect of Enterprise Digital Transformation

This study examined whether enterprise digital transformation impacts the relationship between managerial overconfidence and cash holdings. As its quantitative analysis approaches, it employed the fixed effect method and the generalized method of moments. Firstly, a positive relationship can be found between managerial overconfidence and cash holdings. This study uses behavioural finance to explain why overconfident managers always hold more cash. Secondly, this study aims to contribute further to the field of investigation, providing additional insight into this matter. This study highlights the significance of digital transformation in mitigating the cognitive bias of overconfident managers and ensuring the organization’s successful development in a highly competitive market. This study finds that enterprise digital transformation effectively mitigates overconfident managers holding excess cash during operations. This research not only enhances the understanding of enterprise digital transformation in relation to economic repercussions but also contributes to the affection of digital economic transformation on the corporate governance of Chinese listed companies.

Empowered minority shareholders and corporate cash dynamics: Empirical evidence from China's online voting reform

This study examines whether enhanced minority shareholder voting influences corporate liquidity management. Using China's Rules for the Implementation of Online Voting (Rules) as a natural experiment, we find that increased minority shareholder participation leads to a significant reduction in corporate cash hoarding. By enabling their active participation, the Rules curtails tunneling activities, especially in firms with excess cash reserves, thereby mitigating expropriation by controlling shareholders. This effect is notably stronger in firms with weaker external monitoring mechanisms. Our findings also reveal that empowered minority shareholders contribute to more efficient cash allocation, reflected in higher market valuations of cash holdings and a quicker adjustment toward optimal cash levels. Overall, this study highlights the economic benefits of strengthened minority voting rights in mitigating agency problems and promoting value-enhancing liquidity management strategies.

Deregulating the Volume Limit on Share Repurchases

We empirically advocate for UK regulators to increase the volume limit of 15% outstanding shares on open market repurchases. Our main framework initially tests the determinants of share repurchases based on their size, Small, Medium and Large. The findings reveal that consistent with extant literature, the payout is primarily determined by its capability of distributing excess cash to shareholders and signaling undervaluation. We then check the viability of increasing the volume limit by testing new levels at 2.50% increments, up to 30%. The results indicate that any increase does not broadly change the determinants’ relationship with the payout, rather increased efficiency is realized at every interval, with the 20% and 30% levels being the most favorable.

Capitalizing on Diversity: The Impact of Board Gender Diversity on the Value of Excess Cash

This paper provides novel and comprehensive evidence regarding the impact of board gender diversity on the valuation of excess cash in companies. By analyzing a robust dataset of publicly listed firms in France from 2005 to 2017, the study finds that companies with a higher representation of women on their boards tend to significantly increase the value attributed to their excess cash reserves. The results suggest that investors perceive these companies as more capable of managing their cash efficiently, leading to a higher valuation. This perception likely stems from the belief that diverse boards contribute to better decision-making processes, which in turn enhances the effectiveness of cash utilization. Furthermore, the study uncovers that the positive relationship between board gender diversity and the valuation of excess cash is even more pronounced in firms that demonstrate high earnings quality. This finding underscores the importance of a transparent and reliable informational environment in strengthening the link between gender diversity and the efficient use of corporate resources. The research contributes to the broader corporate governance literature by emphasizing the critical role of board gender diversity in not only promoting effective cash management but also in increasing overall firm value through improved investor confidence and resource allocation strategies.

Does climate risk vulnerability affect the value of excess cash? International evidence

AbstractIn this paper, we investigate the impact of climate risk on the value of excess cash. Based on an international sample of 6468 firm‐year observations from 2010 to 2019, the results show that climate risk vulnerability positively affects the value of excess cash. This suggests that investors may consider firms with excess cash to be better positioned to challenge extreme weather events by using cash reserves to cover up expenses and maintain operations. This positive effect is more pronounced for firms operating in countries with strong investor protection, for those with strong governance quality, and for those with high corporate social responsibility performance. However, it is less accentuated in the presence of financial constraints. Overall, our findings have significant practical implications for decision‐makers, investors, and policymakers.

Impact of product market competition on the overconfidence cash holdings relationship in Chinese firms

Traditional Confucian and hierarchical cultures in China often lead managers to become overconfident and hold more cash, which negatively impacts enterprise development. Therefore, in China, the mitigation of excess cash holdings among overconfident managers is worthy of further research. This study examines the effects of manager overconfidence on corporate cash holdings using data from 922 Chinese listed companies and totals 6849 observations. This study is based on a quantitative analysis approach using the Fixed Effects Model and Generalised Method of Moments. The empirical data indicate that manager overconfidence is positively associated with cash holdings. Furthermore, product market competition mitigates the direct correlation between managerial overconfidence and cash holdings. Finally, the impact was particularly noticeable for small and non-state-owned enterprises. This study draws on China's Confucian and hierarchical cultures to explain why overconfident managers tend to hold more cash and offers a different perspective on how product market competition affects the abovementioned relationship. This research enhances the understanding of managerial overconfidence and its economic repercussions and also contributes to the effect of product market competition on the corporate governance of Chinese listed companies.