The determinants of corporate cash management policies: Evidence from around the world
TL;DR: In this paper, the authors examine the determinants of corporate cash management policies across a broad sample of international firms and find 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 country with weak legal protection.
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.
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22 Jul 2020
TL;DR: In this article, the authors investigated the rise of corporate net lending in G7 countries for the period 1990-2015 and found that the process of financialisation and functional income distribution played a significant role in the determination of the level of corpora' net lending.
Abstract: This thesis investigates the rise of corporate net lending in G7 countries for the period 1990-2015. This process implies that corporate savings are in excess of capital expenditure, so that, on average, firms can finance investment solely via internal funds. This novel development contrasts with the conventional assumption about the corporate sector being a net borrower. Despite the growing importance of this phenomenon, the causes that have contributed to the rise of corporate net lending are still open to debate. This thesis contributes to filling the existing gaps in the literature by examining two, so far unexplored, channels: the process of financialisation and the functional income distribution. To address these aspects, the research employs a big dataset of annual firm-level data of listed non-financial corporations from G7 countries. The empirical findings indicate that the process of financialisation and functional income distribution have played a significant role in the determination of the level of corporate net lending.
The capacity of firms to self-finance their investment also has important consequences for the economic and financial literature. In this respect, the thesis critically discusses the measure of External Financial Dependency. This measure is meant to reflect structural and technological characteristics of the industries that are assumed not to change over time and across countries. Despite the wide use of this concept in the economic and financial literature, there is little discussion about its theoretical foundations. This dissertation fills this gap, analysing the possible determinants of external financial dependency. It argues that the standard formulation of external financial dependency can be considered a proxy of corporate net lending that can fluctuate. This implies that the standard measure of external financial dependency does not uniquely reflect structural and unmodifiable technological features of the industries. Furthermore, after extending the original calculations to G7 countries covering a period of 35 years (1980-2015), the thesis demonstrates that the assumptions of stability over time and across countries find little empirical support.
11 citations
Dissertation•
28 Jan 2014TL;DR: In this paper, the authors propose an approach to analyze the transparence between microeconomics and macroeconomics by using donnees microeconomiques and macroeconomic models.
Abstract: Cette these propose d'analyser via l'utilisation de donnees microeconomiques les canaux specifiques a travers lesquels la transparence serait susceptible de promouvoir la croissance des firmes apprehendee par l'effort d'Investissement et d'alleger leurs contraintes de financement. Ce travail se donne un double objectif. Il s'agit d'abord, de construire deux scores de transparence microeconomique et macroeconomique a travers une analyse discriminante multiple portant sur un echantillon de 64 pays entre 1997 et 2009, mettant egalement en evidence les facteurs les plus influents sur les deux types de transparence. Ensuite, l'integration des scores de transparence dans un modele d'investissement base sur l'equation d'Euler permet d'evaluer les effets respectifs des deux types de transparence sur les contraintes de financement et sur le niveau de l'investissement reel. Cette etude, portant sur un echantillon de 5652 firmes entre 2005 et 2009, fait ressortir une hierarchisation des effets des deux types de transparence. Ces effets sont aussi plus importants pour les firmes des pays emergents. Notre etude suggere egalement que la transparence microeconomique et la transparence macroeconomique allegent plus les contraintes financieres des firmes les moins endettees et stimulent plus l'investissement des firmes les plus endettees. Il ressort de cette recherche que les petites firmes sont plus a meme de tirer profit des avantages des deux types de transparence. L'etude met en relief une non-linearite de l'effet de la transparence microeconomique sur l'investissement et des effets de la transparence macroeconomique sur les contraintes de financement et l'investissement des firmes.
8 citations
Dissertation•
17 Sep 2012
TL;DR: Tese de doutoramento em Economia, apresentada a Faculdade de Economia da Universidade de Coimbra as discussed by the authors, is an example.
Abstract: Tese de doutoramento em Economia, apresentada a Faculdade de Economia da Universidade de Coimbra
7 citations
Dissertation•
01 Jul 2015
TL;DR: In this article, the authors present an overview of the literature and research opportunities in the area of working capital management and its application in the context of finance, and present a list of the most cited works.
Abstract: ................................................................................ II ACKNOWLEDGEMENTS ................................................................ III DECLARATION ........................................................................... IV CONTENTS ................................................................................. V LIST OF TABLES .......................................................................... IX LIST OF FIGURES ........................................................................ XI CHAPTER 1 – INTRODUCTION 1.1 Background ........................................................................... 1 1.2 Problems and Research Questions ................................................. 2 1.3 Summary of Current Literature and Research Opportunities .................. 5 1.3.1 The Determinants of WCM ............................................... 6 1.3.2 WCM and Corporate Profitability ........................................ 9 1.4 Research Objectives ................................................................. 15 1.5 Theory Choice and Use in the Thesis ...... ....................................... 17 1.5.1 Pecking Order Theory ...................................................... 17 1.5.2 Agency Theory ............................................................. 18 1.5.3 Maturity Matching Theory ................................................. 19 1.6 Key Findings and Research Contributions ....................................... 20 1.6.1 Chapter 3 .....................................................................21 1.6.2 Chapter 4 .....................................................................21 1.6.3 Chapter 5 .....................................................................21 1.7 Thesis Outlines ....................................................................... 22 CHAPTER 2 – OVERVIEW OF WORKING CAPITAL MANAGEMENT 2.1 Definition of WCM .................................................................. 23 2.1.1 Components of Working Capital ......................................... 25 2.1.2 Aggressive versus Conservative WCM Policies ........................ 26
6 citations
01 Jan 2017
TL;DR: In this article, the authors examined the facts of working capital management practices adopted by Pakistani firms listed on Pakistan Stock Exchange (PSX) and found evidence that mostly firms follow hedge approach in financing and which involves a tradeoff between liquidity and profitability.
Abstract: The study examines the facts of working capital management practices adopted by Pakistani firms listed on Pakistan Stock Exchange (PSX). We collected data from 126 financial managers by using a questionnaire. We also make the discussion with financial analysts to know the components of working capital practices i.e. cash management, account receivable management, payable management, and inventory management. We found evidence that mostly firms follow hedge approach in financing and which involves a tradeoff between liquidity and profitability. Respondents consider account receivable management is backbone of efficient Working Capital. Moreover, we conclude that mostly firms rely on cash conversion cycle being a financial measure of WCM. Further, Pakistani firms tend to use centralized cash management and not follow any statistical tool or measure to control over inventory. Policy and decision makers and finance managers should pay more attention towards managing components of working capital and use statistical tool or software to check and evaluate their performance.
4 citations
References
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Book•
01 Jan 1936
TL;DR: In this article, a general theory of the rate of interest was proposed, and the subjective and objective factors of the propensity to consume and the multiplier were considered, as well as the psychological and business incentives to invest.
Abstract: Part I. Introduction: 1. The general theory 2. The postulates of the classical economics 3. The principle of effective demand Part II. Definitions and Ideas: 4. The choice of units 5. Expectation as determining output and employment 6. The definition of income, saving and investment 7. The meaning of saving and investment further considered Part III. The Propensity to Consume: 8. The propensity to consume - i. The objective factors 9. The propensity to consume - ii. The subjective factors 10. The marginal propensity to consume and the multiplier Part IV. The Inducement to Invest: 11. The marginal efficiency of capital 12. The state of long-term expectation 13. The general theory of the rate of interest 14. The classical theory of the rate of interest 15. The psychological and business incentives to liquidity 16. Sundry observations on the nature of capital 17. The essential properties of interest and money 18. The general theory of employment re-stated Part V. Money-wages and Prices: 19. Changes in money-wages 20. The employment function 21. The theory of prices Part VI. Short Notes Suggested by the General Theory: 22. Notes on the trade cycle 23. Notes on mercantilism, the usury laws, stamped money and theories of under-consumption 24. Concluding notes on the social philosophy towards which the general theory might lead.
15,146 citations
Posted Content•
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TL;DR: This paper examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common law countries generally have the best, and French civil law countries the worst, legal protections of investors.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
14,563 citations
TL;DR: The authors showed that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets than those with stronger investor protections.
Abstract: Using a sample of 49 countries, we show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries.
10,005 citations
TL;DR: In this paper, the authors show that standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993), and these large standard errors are the result of uncertainty about true factor risk premiums and imprecise estimates of the loadings of industries on the risk factors.
6,064 citations
Posted Content•
TL;DR: In this paper, the authors present a review of the development and challenges in this empirical research, and uses advances in models of information and incentive problems to motivate those developments and challenges, and discuss implications of this research program for analysis of investment on monetary policy and tax policy.
Abstract: Over the past decade, a number of researchers have extended conventional models of business fixed investment to incorporate a role for financial constraints' in determining investment. This paper reviews developments and challenges in this empirical research, and uses advances in models of information and incentive problems to motivate those developments and challenges. First, I describe analytical underpinnings of models of capital-market imperfections in the investment process, and illustrate the principal testable implications of those models. Second, I motivate tests and describe and critique existing empirical studies. Third, the review considers applications of the underlying models to a range of investment activities, including inventory investment, R&D, employment demand, pricing by imperfectly competitive firms, business formation and survival, and risk management. Fourth, I discuss implications of this research program for analysis of effects of investment on monetary policy and tax policy. Finally, I examine some potentially fruitful avenues for future research.
2,364 citations