Trading costs, liquidity, and asset holdings

In this article I develop a model that accounts for interdependencebetween trading costs in various asset markets arising fromthe optimizing behavior of liquidity traders. The model suggeststhat noise trading is an important determinant of the liquidityof asset markets and provides a positive theory for diversifiedasset holdings by risk-neutral liquidity traders.     

Cash holdings and real asset liquidity

This paper examines the relationship between the ability of a firm to sell its real assets and its cash holdings behavior. A substitution effect exists between the size of cash balances and the liquidity of a firm’s real assets when access to external capital markets is limited. Among financially constrained firms, higher asset liquidity is related to lower cash holdings. Additionally for financially constrained firms, the market value of cash is lower for firms with higher asset liquidity.     

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.     

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.     

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.     

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.     

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.     

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.     

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.     

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.     

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...     

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 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.     

Bank competition and corporate financial asset holdings

This paper investigates how bank competition measured by the geographical distribution of bank branches impacts the financial asset holdings of nonfinancial firms. By using a sample of listed nonfinancial firms in China between 2007 and 2019, we find that intensified bank competition caused by the increase in the number of bank branches around firms significantly increases their noncash financial asset holdings, especially for the firms with a higher level of credit constraints or a greater degree of information asymmetry. The result implies that achieving higher yields is the underlying motive for firms to hold noncash financial assets. Moreover, the competition among non-state-owned banks shows a greater impact on corporate financial asset holdings, and the impact of bank competition on noncash financial asset holdings is more pronounced for non-state-owned firms. Our findings provide insight into the determinants of noncash financial asset holdings of firms in a transitional economy.     

Firm diversification and the value of corporate cash holdings

This paper studies the effect of firm diversification on the value of corporate cash holdings. We develop two hypotheses based on efficient internal capital market and agency problems. We find that the value of cash is lower in diversified firms than in single-segment firms, and that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms. We find that firm diversification has a negative (zero) impact on the value of cash among firms with a lower (higher) level of corporate governance. These findings are consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems.     

National culture and corporate cash holdings around the world

This paper examines whether cultural dimensions explain the variation in corporate cash holdings around the world as well as within the United States. We establish four major findings. First, in an international setting, corporate cash holdings are negatively associated with individualism and positively associated with uncertainty-avoidance. Second, individualism and uncertainty avoidance influence the precautionary motive for holding cash. Third, firms in individualistic states in the United States hold less cash than firms in collectivistic states. Fourth, we show that individualism is positively related to the firm’s capital expenditures, acquisitions, and repurchases while uncertainty avoidance is negatively related. Our findings remain unchanged after controlling for governance factors, firm attributes, and country characteristics.     

Financial constraints,board governance standards,and corporate cash holdings

This study examines whether financial constraints and board governance play substitution roles in lowering agency concerns in corporate cash holdings. Using four firm-specific characteristics of financial constraints and 28 forward-looking board governance standards, we find that board governance mitigates agency concerns in cash holdings more significantly for financially less-constrained firms. Consistently, financially less-constrained firms increase the level of board governance and adopt more board governance standards. A natural experiment with the 2007 financial crisis provides robustness to our findings. Our evidence suggests that financial constraints interrelate with the effectiveness of board governance on corporate cash holdings.     

Corporate cash holdings,foreign direct investment,and corporate governance

The determinants of corporate cash holdings in the context of corporate governance theories have recently been analyzed in the literature. In the present study, the behavior of corporate managers in countries with poor shareholder rights protection is more in conformity with the agency problem theory than other corporate governance theories. Also, smaller firms tend to hold larger cash balances relative to their total assets than their larger counterparts. Foreign Direct Investment (FDI) inflows in today's highly integrated capital markets act as substitutes for corporate cash holdings. When firms in G-7 countries are separated from the ones in other countries, FDI inflows demonstrate different effects on international corporate cash holdings: They are substitutes for cash holdings in the former group of countries but become complements for cash holdings by firms in the latter one.