Corporate cash holdings: Causes and consequences

The considerable growth in corporate cash holdings around the world has prompted scholarly interest. Consequently, there is now a large academic literature examining cash holdings and their impact on corporate outcomes and firm values. This article reviews and synthesizes the literature to offer insight into two primary motives to hold cash: precautionary and agency. We first present a stylized model that explores the trade-off in holding cash between these two motives and then examine empirical studies to determine how existing theories are supported by evidence using data from a variety of countries. In addition, we examine the effectiveness of a variety of corporate governance devices in curtailing cash holdings and also the extent to which these devices offer investors' confidence that cash will not be wasted. Finally, we discuss methodological and measurement issues associated with empirical cash holdings studies.     

Financial dollarization in Russia: causes and consequences

We review some aspects of financial dollarization in Russia, applying the main relevant theories to analyse the dynamics of several dollarization indicators. An econometric model of the short-run dynamics of deposit and loan dollarization is estimated for the last decade. We find that ruble appreciation was the main driver of the de-dollarization that occurred then and of the later episode of renewed dollarization. We estimate the overall (and sectoral) currency mismatches of the Russian economy. Evidence is presented for the significant currency risk vulnerability of the non-banking private sector.     

Dollarization of bank deposits: Causes and consequences

This paper assesses the benefits and risks associated with dollarization of bank deposits. We provide novel empirical evidence on the determinants of deposit dollarization, its role in promoting financial development, and on whether dollarization is associated with financial instability. We find that: (a) the credibility of macroeconomic policy and the quality of institutions are both key determinants of cross-country variations in dollarization; (b) dollarization is likely to promote financial deepening only in a high inflation environment; and (c) financial instability is likely higher in dollarized economies. The implications of these findings for financial sector and monetary policies are briefly discussed.     

Auditors' perception of management: Determinants and consequences

An experiment was conducted to examine the determinants and consequences of auditors' perceptions of management. Based on the theory of correspondent inference (Jones & Davis, 1965), the following hypotheses were formulated: (1) auditors are most likely to make a dispositional inference about management when a transaction deviates from expectations and is made under conditions of high choice; (2) auditors are more likely to make a dispositional inference about the management of a new client than that of a continuing client; and (3) dispositional inferences about management will affect auditors' subsequent judgments. The results support the first hypothesis. Contrary to the second hypothesis, subjects' dispositional inferences about management did not differ significantly between the continuing client and the new client conditions. Finally, the materiality threshold of auditors was found to be significantly associated with their inferences about management.     

Culture's consequences in controlling agency costs: Egyptian evidence

This study examines the business environment of Egypt, a nation at the beginning of its transition to a market economy, to determine whether national culture is associated with the use of accounting-based debt covenants in debt agreements. As a country's economy develops, agency problems occur. One method of reducing agency costs is the use of accounting-based debt covenants. While there has been extensive research on agency theory, most of this research has focused on developed nations. We examine three periods of Egyptian economic development using 140 Egyptian debt agreements. The use of accounting-based debt covenants increased significantly during each successive period of development. Proxies for each of (Hofstede, G. (1980). Culture's consequences—International differences in work-related values. Beverly Hills, London: Sage Publications) cultural dimensions are significantly different between the three periods, suggesting that national culture changes with economic development. Three of the four cultural dimensions are significant when regressed on the number of accounting-based debt covenants in debt agreements. This indicates that as a country develops, national culture is associated with the control and understanding of the business process.     

Unintended regulatory consequences: Evidence from the Korean IPOs

We examine IPOs in Korea during the period August 2000–January 2002. We conclude that the high level of underpricing in Korean IPOs is the unintended consequence of regulations designed to promote fairness. Two aspects of the regulations distort the process — an “essential price” formula that severely understates the value of the firm; and, bid exclusion rules that give investors a strong incentive to cluster their bids so as to avoid being excluded from the offering. During our sample period the rules were changed somewhat. The result was a change to gaming behavior and somewhat less underpricing.     

Some consequences of banks' LDC loans: A note

The realized returns on LDC loans made prior to 1980 and hypothetically sold at (below par) secondary market prices in either 1986, when a secondary market first began, or, say, in 1989 are moderately positive. The realized risk-adjusted returns to investors on a portfolio of large LDC lending bank stocks are unmistakenly lower than the return on a broad market index, though they are not significantly so. Similarly, although the difference is not statistically significant, the average realized return on LDC lending banks' stocks is well below that of a portfolio of non-LDC lending banks. The article concludes that while shareholders suffered economic losses as a result of LDC lending activity, these losses were not quantitatively large.     

Determinants and consequences of noncompliance with the 2013 COSO framework

The Securities and Exchange Commission (SEC) requires firms to use a “suitable framework” as a basis for evaluating the effectiveness of internal control over financial reporting. The COSO 1992 framework was the most commonly used suitable framework until it was superseded by the COSO 2013 framework. Because strict compliance with the updated framework was not enforced by regulatory authorities, a nontrivial number of firms did not comply in a timely fashion. We investigate determinants and consequences of noncompliance with the COSO 2013 framework following the supersession of the COSO 1992 framework. We find that noncompliance is positively associated with proxies for resource constraints, financial distress, and a weak internal control environment, and negatively associated with auditor industry specialization, board size, and audit committee accounting expertise. Further tests suggest that following supersession of the 1992 framework, investors view quarterly earnings surprises of the noncompliant firms to be less credible and that noncompliance increases regulatory scrutiny. Finally, we find some evidence that accounting conservatism increases after supersession of the 1992 framework for compliant firms relative to noncompliant firms, suggesting that noncompliance can delay the potential benefits of implementing the updated framework.     

Flexibility in cash-flow classification under IFRS: determinants and consequences

International Financial Reporting Standards (IFRS) allow managers flexibility in classifying interest paid, interest received, and dividends received within operating, investing, or financing activities within the statement of cash flows. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 76, 60, and 57% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, higher leverage, and accessing equity markets more frequently. In analyzing the consequences of reporting flexibility, we find some evidence that the market’s assessment of the persistence of operating cash flows and accruals varies with the firm’s classification choices and the results of certain OCF prediction models are sensitive to classification choices.     

Shareholder democracy in play: Career consequences of proxy contests

This paper shows that proxy contests have a significant adverse effect on careers of incumbent directors. Following a proxy contest, directors experience a significant decline in the number of directorships not only in the targeted company, but also in other nontargeted companies. The results are established using the universe of all proxy contests during 1996–2010. To isolate the effect of the proxy contest, our empirical strategy uses within-firm variation in directors? exposure to the possibility of being voted out and exploits the predetermined schedule of staggered boards that allows only a fraction of directors to be nominated for election every year. We find that nominated directors relative to non-nominated ones lose 58% more seats on other boards. The evidence suggests the proxy-contest mechanism imposes a significant career cost on incumbent directors.     

Financial statement presentation of discontinued operations: Determinants and consequences

US GAAP requires firms to separately report income from discontinued operations within the income statement. Current financial reporting guidance, however, allows managers to either aggregate or disaggregate operating income (or loss) and gain (or loss) from discontinued operations on the face of the income statement. Using this unique setting, we hand-collect data on the presentation of discontinued operations (i.e., aggregated versus disaggregated presentation) to understand factors that affect the discretionary presentation choices in financial statements. We show that managers' disaggregation preference in reporting discontinued operations reflect properties of prospect theory and mental accounting theory. We fail to find empirical evidence that investors' valuation of discontinued operations is different for aggregated and disaggregated presentations. These results should help managers, regulators, and investors understand the implications of discontinued operations' presentation choices in financial reporting.     

Material values: A study of some antecedents and consequences

Two studies were conducted to analyze some antecedents and consequences of holding material values among college students from Mexico. Participants completed a battery of questionnaires measuring social comparison orientation, autonomy support, materialism, life satisfaction, positive and negative affect, and job preferences. Results showed that social comparison was a robust predictor of materialism in both studies. Materialism was related to lower levels of positive affect and life satisfaction and to higher levels of negative affect. Materialism was also related to a preference for jobs that pay more money at the expense of working longer hours or doing more routine tasks. The implications of the results were discussed.     

Research for sale: Determinants and consequences of paid-for analyst research

I examine the determinants and market impact of paid-for coverage using a hand-collected sample of paid-for reports over 1999–2006. More than five hundred publicly listed US companies paid for analyst coverage since 1999. Yet little is known about the informational consequences of this analyst research. Firms with greater uncertainty, weaker information environments, and low turnover are more likely to buy coverage as they have the most to gain from analyst coverage but are unlikely to attract sell-side analysts. Despite the inherent conflicts of interest, I find paid-for reports have information content for investors based on 2-day abnormal returns. After the initiation of coverage, companies experience an increase in institutional ownership, sell-side analyst following, and liquidity. In addition, the results are strongest for the fee-based research firm with ex ante policies that reduce potential conflicts of interest.     

Internationalization of the world'securities markets: Economic causes and regulatory consequences

Additional funding support for this study was provided by the Kendyl K. Monroe Research Fund and the John M. Olin Program in Law and Economics at the Stanford Law School.     

The economic consequences of increased disclosure: Evidence from international cross-listings

We examine market behavior around earnings announcements to understand the consequences of the increased disclosure that non-U.S. firms face when listing shares in the U.S. We find that absolute return and volume reactions to earnings announcements typically increase significantly once a company cross-lists in the U.S. Furthermore, these increases are greatest for firms from developed countries and for firms that pursue over-the-counter listings or private placements, which do not have stringent disclosure requirements. Additional tests support the hypothesis that it is changes in the individual firm's disclosure environment, rather than changes in its market liquidity, ownership, or trading venue, that explain our findings.     

A dynamic analysis of executive stock options: Determinants and consequences

We investigate the determinants of executive stock options (ESOs) and their impact on risky investment and subsequent firm performance in a dynamic setting. We find that, first, the dynamic response of ESOs to growth opportunity and risk is positive and lasts for two to three years. Second, the dynamic response of risky investments to option compensation is positive but converges to zero after three years. More importantly, the positive effect of ESOs on risky investments is observed when CEOs' personal risk-aversion is taken into account. Third, accounting performance responds positively to the risky, option-induced investment, but the dynamic effect lasts only for one year. Meanwhile, when managers undertake more risky investments than what ESOs imply, accounting performance responds negatively to the over-investment.     

Macroeconomic consequences of terror: theory and the case of Israel

This paper analyzes the effect of terror on the economy. Terror endangers life such that the value of the future relative to the present is reduced. Hence, due to a rise in terror activity, investment goes down, and in the long run income and consumption go down as well. Governments can offset terror by putting tax revenues into the production of security. Facing a tide in terror, a government that acts optimally increases the proportion of output spent on defense, but does not fully offset the tide. Thus, when terror peaks the long run equilibrium with an optimizing government is of lower output and welfare. Next, we show that this theory of terror and the economy, helps to understand changes in trend and business cycle of the Israeli economy. The estimates show that terror has a large impact on the aggregate economy. Continued terror, at the level of the death toll by about the same size as due to car accidents, is expected to decrease annual consumption per capita by about 5% in 2004. Had Israel not suffered from terror during the last 3 years, we estimate that the output per capita would have been 10% higher than it is today.     

Demutualization: Determinants and consequences of the mutual holding company choice

We investigate the determinants and consequences of the mutual holding company (MHC) structure that allows mutual thrifts to issue stock to outside shareholders while maintaining the mutual form. Capital constrained firms with greater profit opportunities are more likely to choose a full demutualization; demonstrating that the MHC choice can be used to control for over- and under-investment costs. During periods of greater regulatory constraints, MHC firms have lower offer-day returns than full demutualizations. MHC firms are also less likely to be acquired, as the MHC structure provides protection from the market for corporate control. Demonstrating a clear preference by minority shareholders for the elimination of the MHC structure, the announcement of a second-stage conversion generates a 12% return.