Firm Value and Corporate Cash Holdings. Empirical Evidence from the Polish Listed Firms
16 Sep 2019-E & M Ekonomie A Management (Technická Univerzita v Liberci)-Vol. 22, Iss: 3, pp 121-134
TL;DR: In this paper, the authors assess the relationship between corporate cash holdings and firm value for a sample of 719 Polish listed firms over the period 2007-2016, and find that the optimum level of cash holdings is much higher for financially constrained firms than less financially constrained ones.
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.
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TL;DR: The role of sentiment souvisejiciho s kontextem vsak v oblasti financnich rizik zůstava nedostatecně pochopena.
Abstract: Modely, ktere předpovidaji financni riziko spolecnosti, jsou důležitými systemy vcasneho varovani pro stakeholdery podniku. Větsina dosavadnich modelů byla vyvinuta s využitim financnich ukazatelů. Při financnim rozhodovani se vsak stale větsi pozornost věnuje roli textových informaci, ktere mohou poskytnout dalsi vhled do manažerských nazorů a zaměrů a ktere se v posledni době použivaji k ucinnějsimu předpovidani financni výkonnosti podniku. Předchozi přistupy se v tomto ohledu převažně zaměřovaly na sentimentalni analýzu manažerske komunikace. Role sentimentu souvisejiciho s kontextem vsak v oblasti financnich rizik zůstava nedostatecně pochopena. Zde zkoumame, jak sentiment souvisejici s rizikem ve verbalni manažerske komunikaci může předpovědět financni výkonnost spolecnosti, vcetně zadluženosti, ziskovosti, tržni hodnoty a rizika bankrotu. Nase zjistěni poskytuji důkazy o hlavni roli sentimentu souvisejiciho s rizikem jako ukazatele výkonnosti spolecnosti z hlediska financnich rizik. Zejmena pomoci nových seznamů slov souvisejicich s rizikem ukazujeme, že proaktivni řizeni rizik, ktere hleda přiležitosti, ma výrazně pozitivni dopad na financni výkonnost, což znamena, že zucastněne strany by měly ve výrocnich zpravach spolecnosti peclivě zvažit manažerskou komunikaci souvisejici s rizikem.
12 citations
TL;DR: In this paper , the impact of low-quality financial statements on the level of cash holdings of companies listed on the Amman Stock Exchange (ASE) has been examined using a generalized method of moment estimation.
Abstract:
Purpose
This study aims to examine the impact of low-quality financial statements; that is, disclosure violations reported by the Securities Exchange Commission related to the level of cash holdings (CH) of firms listed on the Amman Stock Exchange (ASE).
Design/methodology/approach
Using panel data from 107 ASE-listed companies from 2009 to 2018, the study uses generalized method of moment estimation to examine the research hypothesis. This study hypothesize that disclosure violations can affect the level of CH and control for several variables that affect this level.
Findings
The results show that disclosure violations significantly affect the level of CH and that cash flow, capital expenditure and debt issues have a significantly positive impact on corporate CH. On the other hand, the market to book ratio and sales growth were found to be insignificant.
Research limitations/implications
The limitations of the research include the fact that information on research and development and equity issues were not available, so were not included in the examination.
Practical implications
It is recommended that managers enhance the quality of disclosures since this allows them to hold lower levels of cash and exploit more investment opportunities. Policymakers are recommended to supervise firm disclosures closely and create ratings for disclosure quality.
Originality/value
To the best of the author’s knowledge, this is the first empirical research on the association between proven low-quality disclosures and the level of corporate CH among Jordanian listed companies.
2 citations
TL;DR: In this paper , the authors identify the determinants and indicate their impact on the company's cash holdings in the wholesale industry in ten Balkan countries, using the panel data model with fixed effects.
Abstract: The purpose of this paper is to identify the determinants and indicate their impact on the company’s cash holdings in the wholesale industry in ten Balkan countries. Effective cash holdings management is key to any company’s healthy and smooth business operation, so comprehending and analyzing the relationship between the company’s internal determinants and cash holdings is vital. The sample used for this work included 106 companies, whose operations were studied over a four-year period (2014–2017), using the panel data model with fixed effects. The obtained results showed that three of the five observed variables (size, leverage, non-cash liquid assets, profitability and asset tangibility) have a statistically significant impact on the company’s cash holdings. It was determined that larger wholesale companies generally hold less cash, primarily due to more favorable external sources of financing, thus, financially stronger wholesale companies on the Balkans are likely to hold less cash. Only by practicing adequate inventory management and receivables collection policy can wholesale companies ensure effective working capital, leading to the fact that more profitable wholesale companies hold more cash. The realized profit of wholesale companies is used to increase liquidity as well as to stimulate business growth and development. The research results revealed that, in order to achieve an optimal cash holdings level, the observed wholesale companies in Balkan countries tend to constantly balance between profitability and liquidity. This paper contributes to improving the liquidity of wholesale companies in Balkan countries. It also offers wholesale companies assistance in establishing and maintaining an optimal cash holdings policy in order to reduce the potential risk of financial distress enable them to take advantage of all investment alternatives to maximize profit. All stakeholders will benefit from the developed model with significant determinants of the cash holdings policy along with the findings of this paper, especially when making decisions related to the cash holdings policy of wholesale companies and improving the overall business efficiency.
1 citations
TL;DR: In this paper, the authors construct a model to forecast the corporate cash holding decisions and present it in terms of the difficulty of forecasting and cash demand forecasting, which has always been a focus in theory and practice.
Abstract: Because of the difficulty of corporate cash flow forecasting and cash demand forecasting, the corporate cash holding decisions have always been a focus in theory and practice. This paper constructs...
References
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TL;DR: In this paper, a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables is presented. But the authors do not consider models with predetermined variables that have constant correlation with the effects.
16,245 citations
"Firm Value and Corporate Cash Holdi..." refers methods in this paper
...To solve this endogeneity issues, we use the first difference GMM (FD-GMM) estimator developed by Arellano and Bond (1991) and Arellano and Bover (1995)....
[...]
13,200 citations
TL;DR: In this article, the tax impact of foreign investors' interests within a host developing economy was examined, and the analysis of the dynamic panel data with a system GMM estimator showed significant positive relationships between foreign investors interests and the measures of corporate tax avoidance among large Malaysian companies.
3,631 citations
"Firm Value and Corporate Cash Holdi..." refers methods in this paper
...To solve this endogeneity issues, we use the first difference GMM (FD-GMM) estimator developed by Arellano and Bond (1991) and Arellano and Bover (1995)....
[...]
TL;DR: In this paper, the authors empirically estimate the sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for their theory, and hypothesize that constrained firms should have a positive cash flow sensitivity, while unconstrained firms' cash savings should not be systematically related to cash flows.
Abstract: We model a firm’s demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm’s propensity to save cash out of cash flows (the cash flow sensitivity of cash). We hypothesize that constrained firms should have a positive cash flow sensitivity of cash, while unconstrained firms’ cash savings should not be systematically related to cash flows. We empirically estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory. TWO IMPORTANT AREAS OF RESEARCH in corporate finance are the effects of financial constraints on firm behavior and the manner in which firms perform financial management. These two issues, although often studied separately, are fundamentally linked. As originally proposed by Keynes (1936), a major advantage of a liquid balance sheet is that it allows firms to undertake valuable projects when they arise. However, Keynes also argued that the importance of balance sheet liquidity is influenced by the extent to which firms have access to external capital markets (p. 196). If a firm has unrestricted access to external capital— that is, if a firm is financially unconstrained—there is no need to safeguard against future investment needs and corporate liquidity becomes irrelevant. In contrast, when the firm faces financing frictions, liquidity management may become a key issue for corporate policy. Despite the link between financial constraints and corporate liquidity demand, the literature that examines the effects of financial constraints on firm behavior has traditionally focused on corporate investment demand. 1 In an influential paper, Fazzari, Hubbard, and Petersen (1988) propose that when firms face financing constraints, investment spending will vary with the availability of internal funds, rather than just with the availability of positive net present
2,034 citations
TL;DR: This article study the effect of the recent financial crisis on corporate investment and find that firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance are less likely to invest.
Abstract: We study the effect of the recent financial crisis on corporate investment. The crisis represents an unexplored negative shock to the supply of external finance for non-financial firms. Corporate investment declines significantly following the onset of the crisis, controlling for firm fixed effects and time-varying measures of investment opportunities. Consistent with a causal effect of a supply shock, the decline is greatest for firms that have low cash reserves or high net short-term debt, are financially constrained, or operate in industries dependent on external finance. To address endogeneity concerns, we measure firms’ financial positions as much as four years prior to the crisis, and confirm that similar results do not follow placebo crises in the summers of 2003–2006. Nor do similar results follow the negative demand shock caused by September 11, 2001. The effects weaken considerably beginning in the third quarter of 2008, when the demand-side effects of the crisis became apparent. Additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature.
1,028 citations