Trust and corporate cash holdings

We examine the relation between the level of trust in a country and corporate cash holdings. The precautionary savings motive predicts that firms located in countries with less trusting societies will hoard more cash in order to compensate for reduced access to capital markets. The agency hypothesis predicts that shareholders in countries with low levels of societal trust will pressure firms to disgorge cash. The first theory predicts a negative relation between trust and corporate cash holdings while the second theory predicts a positive relation between these two variables. Using data on firms located in 54 countries around the world, we find evidence in favor of the agency-based explanation for the relation between trust and corporate cash holdings. Overall, our results highlight the role played by informal institutions in shaping corporate financial management.     

Economic policy uncertainty,institutional environments,and corporate cash holdings

We investigate the effect of economic policy uncertainty (EPU) on corporate cash holdings using a large sample of international firms. EPU intensifies concerns of investors on managerial self-dealing and political extraction. Consequently, the potential cost of cash holdings (i.e., expropriation) outweighs its benefit (i.e., precautionary motives), and the optimal amount of cash holdings decreases. We find supportive evidence that firms hold less cash when EPU is high. We further show that the market discounts excess cash holdings under high policy uncertainty, but this negative effect is mitigated by stronger investor protection, better freedom of press, and better government quality.     

Foreign shareholders,relative foreign policy uncertainty and corporate cash holdings

Studies have shown that foreign investors hedge risks stemming from economic and political uncertainty in the home country through outward investment. This paper studies how foreign investors' home country risk affects their overseas investment and the host country firms' corporate cash holdings. We find that relative foreign EPU, defined as the difference between foreign investors' home country EPU and the host country of investment EPU, negatively impacts the host country firms' cash holdings through their influences on managerial decision-making. This negative relationship arises from firms' precautionary and transaction motives as foreign investors perceive lower corporate risk and better investment opportunities in the host country firms. Good corporate governance is also instrumental in yielding this negative relationship. The reduction in cash holdings due to high relative foreign EPU is more pronounced if foreign investors' home country legal environment is weaker, the two countries are further apart, and there is little trade partnership between them.     

Navigating through economic policy uncertainty: The role of corporate cash holdings

We find that U.S. corporations increase their cash holdings in response to higher economic policy uncertainty. The increase in cash holdings is not attributed to a reduction in firm investments. This increase is more pronounced for financially constrained firms or those with larger exposure to policy uncertainty. Holding more cash in the presence of policy uncertainty alleviates the negative impact of policy uncertainty on capital investment and firm innovation outputs. Our findings demonstrate that cash holdings represent an important channel in mitigating the negative effect of policy uncertainty on firm real economic activities.     

Investor protection and corporate cash holdings around the world: new evidence

We provide new evidence that firms under weak governance regimes hold less cash than firms operating under strong governance, contrary to previous literature. Our findings also establish that there are two independent effects for the de jure and de facto aspects of governance that protect minority shareholders. Consistent with managerial empire building prediction, our study reveals that firms deplete their excess cash by overinvesting and this effect is exacerbated in countries with weak governance. The excess cash depletion has an adverse impact on firm performance, more so in countries with weak investor protection which is in support of the agency costs explanation.     

Organization capital and corporate cash holdings

This paper investigates the relationship between organization capital and corporate cash holdings. We develop two competing hypotheses in relating organization capital with cash holding. Our analysis reveals that organization capital is related to high levels of cash holdings. Moreover, we find that the effect of organization capital on corporate cash holdings is stronger for firms experiencing high levels of financing constraint and cash flow risk. Our results remain robust to alternative measures of organization capital and corporate cash holdings, and are not driven by omitted variable bias or endogeneity issues. We also find that the positive relation between organization capital and cash holdings is not confounded by sample period or industry group. Overall, we provide robust evidence that supports the precautionary motive for corporate cash holding.     

Shariah compliance and corporate cash holdings

This study investigates the influence of Shariah compliance status on cash holding levels and the speed of adjustment of non-financial listed firms in six Gulf Cooperation countries from 2005 to 2016. The results show that Shariah compliance status has a significant effect on firms’ cash holding decisions. Shariah-compliant firms have significantly higher cash holding levels than non-Shariah-compliant firms. Further, Shariah-compliant firms adjust more quickly towards their target cash holdings than their conventional counterparts. In our view, Shariah-compliant firms are subject to multiple restrictions that limit their external financing channels. Therefore, holding larger cash reserves is important as it helps gain from the transaction cost motive of holding cash. The findings of this study have important implications for regulators, investors and managers. To the best of our knowledge, this study is the first to compare the effect of Shariah compliance on firms’ cash holdings and the speed of adjustment towards the trade-off theory’s optimal cash holding target.     

Accruals quality and corporate cash holdings

This Work Uses Panel Data For Firms Listed In The Spanish Stock Exchange Over The Period From 1995 To 2001 To Analyse The Effect Of Accounting Quality On Cash Holdings. The Results Show That Firms With Good Accruals Quality Hold Lower Cash Levels Than Firms With Poor Accruals Quality. This Finding Suggests That The Quality Of Accounting Information May Reduce The Negative Effects Of Information Asymmetries And Adverse Selection Costs, Allowing Firms To Reduce Their Level Of Corporate Cash Holdings. The Results Also Show That Cash Holdings Decrease When Firms Increase Their Use Of Bank Debt And In The Presence Of Cash Substitutes. In Contrast With This, Firms With Higher Cash Flow Hold Higher Levels Of Cash.     

CEO overconfidence and corporate cash holdings

This study proposes chief executive officer (CEO) overconfidence to be an alternative explanation to corporate cash holdings. We find positive effects of CEO overconfidence on the level of cash holdings and the value of cash, which are mainly due to the investment environments faced by firms. The positive effects of CEO overconfidence on cash holdings level and cash value are barely affected by the traditional motives of cash holdings based on trade-off and agency theories. The analysis of cash sources further explains why firms with overconfident CEOs can aggressively pursue risky investments and maintain large cash holdings at the same time. Although the prior literature indicates that overconfident CEOs tend to avoid equity issues for their capital investments, the contribution to cash savings from equity is higher than that from debt. Additional robustness tests also support our empirical findings.     

Firm structure and corporate cash holdings

We analyze whether the organizational structure of firms (i.e., whether a firm is diversified or focused) affects their cash holdings. Using Compustat firm level and segment-level data, we find that diversified firms hold significantly less cash than their focused counterparts. Our results are robust to industry adjustments at the segment level and to different factors previously found to be important determinants of cash holdings. Using time-series, cross-sectional, and additional robustness tests we are able to attribute the lower cash holdings among diversified firms to complementary growth opportunities across the different segments of these firms and the availability of active internal capital markets. We find that the other theories that rely on the potentially effective use of asset sales of non-core segments of diversified firms to generate cash, and the increased agency/influence costs in diversified firms do not offer an economically significant explanation for the lower cash holdings among diversified firms.     

Firm selection and corporate cash holdings

Since the early 1980s, the composition of US public firms has progressively shifted toward less profitable firms with high growth potential (Fama and French, 2004). We estimate a dynamic corporate finance model to quantify the role of this selection mechanism for the secular trend in cash holdings among US public firms. We find that an increase in the precautionary savings motive—primarily driven by the decline in initial profitability among R&D-intensive new lists—explains about 50% of the upward trend in cash holdings. This selection mechanism also explains part of the upward trend in sales growth volatility.     

Earnings quality and corporate cash holdings

Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.     

Economic policy uncertainty and corporate cash policy: International evidence

I investigate the influences of economic policy uncertainty on corporate cash policy. The findings show that there is a positive association between economic policy uncertainty and cash holdings, as well as the propensity to save cash out of operating cash flow. Further analyses suggests that economic policy uncertainty affects corporate cash policy by influencing firms’ precautionary saving motives and the effect is larger when firms have difficulty in raising external finance. Using the new index developed by Baker et al. (2016), I extend the literature on economic policy uncertainty and show that it is an important macro-level factor in influencing corporate cash policy.     

Economic policy uncertainty and corporate inventory holdings: evidence from China

We investigate the impact of economic policy uncertainty (EPU) on corporate inventory holdings in China over the period 2007–2017. We find that EPU leads firms to significantly reduce inventory holdings and this effect is particularly pronounced among non-state-owned enterprises. The adjustment of inventory holdings enhances firms’ operating and market performance consequently. In addition, firms with greater financial constraints or stronger external governance are more affected by EPU. Further exploration shows that EPU induces high precautionary cash holdings, which crowds out inventories. Our results illustrate that firms reallocate between inventories and cash to cope with uncertainty associated with economic policy changes.     

CEO marital status and corporate cash holdings

We examine the effect of CEO marital status on corporate cash holdings. Consistent with the classical agency framework, we find that firms with single CEOs hold more cash compared to otherwise similar firms with married CEOs and that the excess cash held by single CEOs is significantly discounted by shareholders. Our findings survive a battery of tests to ease endogeneity and selection bias, confirming that results are not simply reflecting innate heterogeneity in preferences. Overall, our findings indicate that a variable outside the common firm- and macro-level determinants, CEO marital status, can significantly influence corporate policies.     

CEO cultural background and corporate cash holdings

This paper examines whether the cultural background of chief executive officers (CEOs) affects corporate cash holdings. Using UK data from 2000 to 2018, we find that CEOs with a cultural background that emphasises power distance and uncertainty avoidance are positively associated with corporate cash holdings, while CEOs with a cultural background that emphasises masculinity are negatively associated with corporate cash holdings. Our results are robust to various robustness tests. Further analyses show that the impact is more pronounced when power is concentrated among top executives, when the CEOs have a degree of discretion in pursuing their own goals, and when information asymmetry is high.     

Employee protection shocks and corporate cash holdings

We examine the relation between employee protection legislation and corporate cash holdings. Our rationale rests on the notion that higher labor adjustment costs increase a firm's operating leverage making firms to adjust their liquidity management by increasing precautionary savings. Consistent with this, we show that the staggered passage of legal exceptions to the “at-will” employment doctrine in various U.S. states led to an average increase in cash holdings by 7.2%. Cash increases are higher when unionization rates and industry concentration are lower, and when industry discharge rates and volatility is higher. Consistent with the financial flexibility argument of tighter employment protection increasing corporate cash needs, the value of cash increases after the passage of pro-labor regulations. Moreover, we find that the increase in the value of cash is especially pronounced for financially constrained firms.     

Foreign residency rights and corporate cash holdings

Based on the privately owned enterprises in China's A-share stock market from 2007 to 2017, we investigate the relation between foreign residency rights and corporate cash holdings. The empirical results show that privately owned enterprises whose controlling persons have foreign residency rights may hold more cash. Our conclusions are robust when considering the endogeneity concerns, alternative measures of cash holdings and foreign residency rights, additional control variables, the effect of financial crisis. In further analyses part, we discuss the effect of extradition agreements, residency countries' institutional environment, law enforcement efficiency in China, political connections, verifying that the positive relation remains when: (a) controlling persons obtain foreign residency rights from countries that have no extradition agreements with China, (b) residency countries have weak institutional environment, (c) privately owned enterprises are in regions with better law enforcement efficiency, (d) privately owned enterprises have no political connections. Moreover, we explain the reason that why privately owned enterprises with foreign residency rights hold more cash from the perspective of precautionary motive, transaction motive, speculative motive, corporate governance. At last, we find that foreign residency rights are negatively associated with the market value of cash holdings.     

CEO network centrality and corporate cash holdings

Review of Quantitative Finance and Accounting - The social network centrality of Chief Executive Officers (CEOs) has received tremendous attention in recent research. This study examines how CEO...     

International evidence on the non-linear impact of leverage on corporate cash holdings

This paper investigates cash holding behaviour of firms from France, Germany, Japan, the UK and the US using data for 4069 companies over the period 1996–2000. Our focus is particularly on the relation between cash holdings and leverage. We argue that the impact of leverage on cash balances of firms is likely to be non-monotonic. To the extent that leverage of firms acts as a proxy for their ability to issue debt one would expect a negative (substitution effect) relation between leverage and cash holdings. However, as leverage increases firms are likely to accumulate larger cash reserves to minimise the risk of financial distress and costly bankruptcy. Thus, one would expect a positive (precautionary effect) relationship between cash holdings and leverage at high levels of leverage. Our findings provide strong and robust support for a significant non-linear relation between cash holdings and leverage. Additionally, our results show that the impact of leverage on cash holdings partly depends on country-specific characteristics such as the degree of creditor protection, shareholder protection, and ownership concentration.