Corporate cash holdings: Evidence from Switzerland

This paper investigates the determinants of cash holdings for a comprehensive sample of Swiss non-financial firms between 1995 and 2004. The median Swiss firm holds almost twice as much cash and cash equivalents as the median US or UK firm. Our results indicate that asset tangibility and firm size are both negatively related to corporate cash holdings, and that there is a non-linear relationship between the leverage ratio and liquidity. Dividend payments and operating cash flows are positively related to cash reserves, but we cannot detect a significant relationship between growth opportunities and cash holdings. Most of these empirical findings, but not all of them, can be explained by the transaction costs motive and/or the precautionary motive. Analyzing the corporate governance structures of Swiss firms, we document a non-linear relationship between managerial ownership and cash holdings, indicating an incentive alignment effect and an opposing effect related to increasing risk aversion. Finally, our results suggest that firms in which the CEO simultaneously serves as the COB hold significantly more cash.

Cash holdings of politically connected firms

Politically connected firms benefit from soft-budget constraints and are unlikely to suffer from liquidity constraints. This argument suggests that politically connected firms should hold less cash than non-connected peers. Another view posits that these firms exhibit acute corporate governance problems. In this setting, politically connected firms are more likely to hold more cash than non-connected firms. Using a sample of 50,119 firm-year observations from 31 countries, we find that politically connected firms hold more cash than their non-connected peers. We put forth two explanations for this result. Firstly, politicians use politically connected firms as “cash cows” to advance their political agendas. Secondly, political connections are conducive to agency problems. In additional analyses, we find that the positive relationship between political connections and cash holdings is stronger when corporate governance is weak.     

The relationship between a firm’s information environment and its cash holding decision

This study directly investigates the relationship between the firm’s information environment and its cash holding decision using two separate country-level events as proxies for a general improvement of the information environment: the initial enforcement of new insider trading laws and the mandatory adoption of International Financial Reporting Standards. Analysing a large international sample, we find that firms reduce their cash holdings after both exogenous information shocks. We also find that the reductions are greater for firms facing greater financing constraints and agency issues, and for those for which the informational shocks are stronger. Further analyses reveal a reduction in firms’ average cash savings rate, an increase in performance, an increase in the use of external debt, a decrease in abnormal investment, and an increase in the value of cash holdings. Taken together, our results suggest that an improvement in the information environment mitigates both the adverse selection and moral hazard problems thereby, leading to a reduction in cash reserves held for transaction and precautionary motives, and the likelihood of entrenched managers building large cash balances for private benefit.