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Journal ArticleDOI

Determinants of Corporate Cash Holdings

01 Feb 2017-Global Business Review (SAGE PublicationsSage India: New Delhi, India)-Vol. 18, Iss: 2, pp 416-427

AbstractThis article aims at examining the financial determinants of corporate cash holdings. The study employs panel data regression method. It uses the fixed-effects method based on Hausman test results ...

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Citations
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01 Jan 2009
Abstract: We examine the determinants of corporate cash management policies across a broad sample of international firms. We document that firms in countries with strong legal protection of minority investors are more likely to decrease their cash holdings in response to an increase in cash flow than are firms in countries with weak legal protection. This relationship is most pronounced for firms that are financially constrained and those with high hedging needs. More importantly, we do not find evidence that financial development plays an incremental impact on the cash flow sensitivity of cash, after controlling for the effect of legal protection. Therefore, we argue that the legal protection of investors (rather than financial development) represents the first-order effect in influencing international firms' cash management policies. The results are robust to alternative specifications. In general, our findings reinforce the importance of country-level legal protection of investors in mitigating the effects of firm-level financial constraints and hedging needs on corporate cash management policies.

10 citations

Journal ArticleDOI
Abstract: In present dynamic environment, financial flexibility has become an important constituent of corporate finance decisions. Financial flexible firms are ostensibly more resilient to exogenous shock vis-a-vis non-flexible firms. Capital structuring decisions, payout decisions and conservative cash policy are various tactics adopted by financial managers for attaining financial flexibility. Present study attempts to identify key enablers of financial flexibility and structure them into a total interpretive structural model using modified TISM approach. Using literature review, business environment, cost of capital, stage of life cycle, free cash reserves, agency relations, payout policy, and leverage are identified as seven constituents of corporate financial flexibility. Based on their interpretive interdependencies/ relationship, a hierarchical model of financial flexibility is developed exhibiting a holistic view of financial flexibility decisions from triggers to final outcome. The findings result into a four-step novel framework situation-actors-actions-outcome framework of financial flexibility, with business environment and stage of life cycle as situation/ triggers, free cash reserves and agency as actors/precursors, payout and leverage as actions/ decisions and cost of financing as outcome of financial flexibility decision. Model lends credence to financial flexibility as situation-specific decision. It is a reservoir to address exogenous income and investment shocks. Firms generating free cash flow are invariably flexible to meet income and investment shocks. However, firms with fluctuating operations need buffer in form of cash reserves or debt capacity to address the contingencies. Investment in good corporate governance practices can serve as an intangible reserve and an alternative to costly tangible ways such as cash surplus and leverage. Such firms with shareholders’ support are deemed more flexible in payouts, capital structuring, investment decisions and overall operations, and less reliant on external financing.

5 citations

Journal ArticleDOI
Abstract: In the context of imperfect markets, it is important to understand the relationship between nonearning assets and firm value, in order to evaluate the corporate financial policies and to attain the right equilibrium between liquidity and profitability. The aim of our paper is to assess the relationship between corporate cash holdings and firm value for a sample of 719 Polish listed firms over the period 2007-2016. The study reports an inverted U-shape relationship between cash holdings and firm value, irrespective of whether we use static regression methods or dynamic panel regression. Our results confirm the existence of an optimum level of cash holdings at 27.06% of total assets. Furthermore, the nonlinear relationship between firm value and corporate cash holdings is found for all Polish listed firms, financially and less financially constrained. We report two breakpoints of the cash-value relationship, in the context of financial constraints, and the results indicate that the optimum level of cash holdings is much higher for financially constrained firms than less financially constrained ones. Finally, we show that the financial crisis has no additional impact on the nonlinear relationship between cash holdings and firm value. We validate the financial constraints as having a more pronounced effect on the relationship between corporate cash holdings and firm value, compared to the financial crisis, as intervening effects, in the context of the Polish economy. This study holds important microeconomics policy implications – firm-level financial policies should evaluate the tradeoff between cash holdings and market value in order to maintain the firm financial performance.

4 citations

Journal ArticleDOI
Abstract: We examine the relationship between corporate cash holdings and promoter ownership for a sample of Indian non-financial firms. Consistent with the arguments of the ‘efficient monitoring hypothesis’, our results broadly suggest that promoter ownership is negatively associated with cash holdings, thereby highlighting the role of large owners in preventing cash accretion in an emerging market context. Indicating prominent influence of corporate ownership on cash management, we find that corporate non-promoter ownership is also negatively related with cash holdings. With regard to promoter ownership of foreign entities, our results suggest that cash holdings share a U-shaped relationship with ownership of foreign promoter corporations. In addition, our findings provide weak evidence to support a more pronounced negative association between cash holdings and promoter ownership for group-affiliated firms as compared to non-affiliated firms since the former faces lower financial constraints on account of access to internal capital markets. Finally, we perform long-term effect analysis in order to reinforce robustness of our results.

4 citations

Journal ArticleDOI
Abstract: The article examines the pattern of cash holdings of 266 Indian companies comprised in the S&P BSE 500 index for the period 2005–2015 to understand the factors that influence the level of c...

4 citations


References
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Journal ArticleDOI
Abstract: Using the result that under the null hypothesis of no misspecification an asymptotically efficient estimator must have zero asymptotic covariance with its difference from a consistent but asymptotically inefficient estimator, specification tests are devised for a number of model specifications in econometrics. Local power is calculated for small departures from the null hypothesis. An instrumental variable test as well as tests for a time series cross section model and the simultaneous equation model are presented. An empirical model provides evidence that unobserved individual factors are present which are not orthogonal to the included right-hand-side variable in a common econometric specification of an individual wage equation.

14,832 citations

Posted Content
Abstract: The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.

14,358 citations

Journal ArticleDOI
Abstract: This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.

12,954 citations

Journal ArticleDOI
Abstract: Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such ‘real options’ depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a suboptimal investment strategy or by forcing the firm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.

11,862 citations

Book
28 Apr 2021
Abstract: Preface.1. Introduction.1.1 Panel Data: Some Examples.1.2 Why Should We Use Panel Data? Their Benefits and Limitations.Note.2. The One-way Error Component Regression Model.2.1 Introduction.2.2 The Fixed Effects Model.2.3 The Random Effects Model.2.4 Maximum Likelihood Estimation.2.5 Prediction.2.6 Examples.2.7 Selected Applications.2.8 Computational Note.Notes.Problems.3. The Two-way Error Component Regression Model.3.1 Introduction.3.2 The Fixed Effects Model.3.3 The Random Effects Model.3.4 Maximum Likelihood Estimation.3.5 Prediction.3.6 Examples.3.7 Selected Applications.Notes.Problems.4. Test of Hypotheses with Panel Data.4.1 Tests for Poolability of the Data.4.2 Tests for Individual and Time Effects.4.3 Hausman's Specification Test.4.4 Further Reading.Notes.Problems.5. Heteroskedasticity and Serial Correlation in the Error Component Model.5.1 Heteroskedasticity.5.2 Serial Correlation.Notes.Problems.6. Seemingly Unrelated Regressions with Error Components.6.1 The One-way Model.6.2 The Two-way Model.6.3 Applications and Extensions.Problems.7. Simultaneous Equations with Error Components.7.1 Single Equation Estimation.7.2 Empirical Example: Crime in North Carolina.7.3 System Estimation.7.4 The Hausman and Taylor Estimator.7.5 Empirical Example: Earnings Equation Using PSID Data.7.6 Extensions.Notes.Problems.8. Dynamic Panel Data Models.8.1 Introduction.8.2 The Arellano and Bond Estimator.8.3 The Arellano and Bover Estimator.8.4 The Ahn and Schmidt Moment Conditions.8.5 The Blundell and Bond System GMM Estimator.8.6 The Keane and Runkle Estimator.8.7 Further Developments.8.8 Empirical Example: Dynamic Demand for Cigarettes.8.9 Further Reading.Notes.Problems.9. Unbalanced Panel Data Models.9.1 Introduction.9.2 The Unbalanced One-way Error Component Model.9.3 Empirical Example: Hedonic Housing.9.4 The Unbalanced Two-way Error Component Model.9.5 Testing for Individual and Time Effects Using Unbalanced Panel Data.9.6 The Unbalanced Nested Error Component Model.Notes.Problems.10. Special Topics.10.1 Measurement Error and Panel Data.10.2 Rotating Panels.10.3 Pseudo-panels.10.4 Alternative Methods of Pooling Time Series of Cross-section Data.10.5 Spatial Panels.10.6 Short-run vs Long-run Estimates in Pooled Models.10.7 Heterogeneous Panels.Notes.Problems.11. Limited Dependent Variables and Panel Data.11.1 Fixed and Random Logit and Probit Models.11.2 Simulation Estimation of Limited Dependent Variable Models with Panel Data.11.3 Dynamic Panel Data Limited Dependent Variable Models.11.4 Selection Bias in Panel Data.11.5 Censored and Truncated Panel Data Models.11.6 Empirical Applications.11.7 Empirical Example: Nurses' Labor Supply.11.8 Further Reading.Notes.Problems.12. Nonstationary Panels.12.1 Introduction.12.2 Panel Unit Roots Tests Assuming Cross-sectional Independence.12.3 Panel Unit Roots Tests Allowing for Cross-sectional Dependence.12.4 Spurious Regression in Panel Data.12.5 Panel Cointegration Tests.12.6 Estimation and Inference in Panel Cointegration Models.12.7 Empirical Example: Purchasing Power Parity.12.8 Further Reading.Notes.Problems.References.Index.

10,280 citations