Optimal investment with fixed financing costs

Models with a premium on external finance produce counterfactual predictions about liquidity management. We address this shortcoming by introducing a fixed cost of increasing external finance into an otherwise standard investment/financing problem. This additional financial friction is well-motivated by case studies and our analysis shows that it generates more realistic predictions about liquidity management: firms hold external finance and idle cash simultaneously, and may invest an additional dollar of cash flow in liquidity rather than repaying external funds or investing in productive capital. In addition to better fitting the stylized facts about the time-series and cross-sectional pattern of liquidity holding, these results may help shed light on the fragility of estimates of investment–cash flow sensitivities.     

Does the value of cash holdings deteriorate or improve with material weaknesses in internal control over financial reporting?

We find that cash holdings are more valuable for firms disclosing material weaknesses in the Sarbanes–Oxley (SOX) 404 internal control assessments. We estimate that the value spread for firms with weak controls vs. effective controls is about $0.25 for an extra dollar of cash. Our results are not driven by account-level weaknesses but by more severe, company-level weaknesses in internal control over financial reporting (ICFR). Further, the economic consequences of cash resources significantly decrease with the remediation of previously reported material weaknesses. These results suggest that the favorable (precautionary) impact induced by weak ICFR appears to more than offset the adverse (agency) effect entailed by ineffective ICFR. Overall, our results survive alternative variable specifications, sample splits, matched sample analyses, and a variety of controls.     

激进战略与企业现金持有——预防性动机还是代理动机

以2007-2016年A股非金融上市公司为样本,考察了公司战略激进程度对现金持有决策的影响,并从现金持有价值与竞争效应两个角度,探讨不同公司战略类型下现金持有经济后果的差异。研究结果显示：公司战略越激进,企业现金持有水平越高;并且战略越激进,现金持有价值越高,现金的竞争效应越强。进一步研究表明：随着融资约束和经济政策不确定性的提高,采取激进战略的公司,现金持有水平进一步提高。这说明公司战略是影响现金持有决策的重要因素,而战略激进的公司持有大量现金主要是出于预防性动机,而非代理动机。     

Excess cash holdings and investment: the moderating roles of financial constraints and managerial entrenchment

Our study investigates the relationship between excess cash holdings and investment behaviour under two dimensions of financial constraints and managerial entrenchment, based upon a sample of Taiwanese firms operating in an environment characterized by poor legal protection for investors, with data covering the years 2000–2006. We find that excess cash is significantly correlated with capital expenditure, particularly for firms financially constrained and with severe managerial entrenchment. However, the evidence shows that excess cash is insensitive to R&D expenditure under these two dimensions.     

Diversification and cash dynamics

Why do diversified firms hold significantly less cash than focused firms? We study this question using a dynamic model of corporate investment, saving, and diversification decisions. We find that investment dynamics are more important in explaining the cash differences than financing frictions. More efficient internal capital markets increase cash differences and are especially valuable when a firm diversifies or refocuses. Contrary to static models, more diverse conglomerates have lower cash differences. Endogenous selection (diversifying firms are larger and have better growth opportunities) accounts for 68% of the cash difference, and the diversification event itself reduces cash holdings by 32%.     

Too much liquidity? Seemingly excess cash for innovative firms

We show that more cash allows innovative firms facing financing constraints to undertake more research and development projects and that this phenomenon has been more pronounced since 1980. In contrast to the secular increase in the level of cash holdings, average excess cash has not increased appreciably. We analyze excess cash disposition and document a strong relation between excess cash and research and development spending. Finally, our results suggest that increased difficulty in valuing research and development might be a source of financing frictions. These findings imply that “seemingly excess cash” has played an increasingly important role in mitigating underinvestment in innovation.     

Divestitures,wealth effects and corporate governance

We analyse the market reaction to divestiture decisions and determine the impact of corporate governance practices. We find the market reaction is significant and can be determined using internal governance mechanisms. We evaluate the determinants of the decision to sell using a control sample of firms displaying characteristics often associated with divestitures indicating that these firms may face the same incentives to divest but elect not to restructure in this manner. Our results suggest that a combination of strong internal and external governance may force managers to act in a manner that is incompatible with their personal desires.     

Does board gender diversity affect corporate cash holdings?

This paper examines whether board gender diversity affects corporate cash holdings using S&P 1500 index firms in the US for the period 2006–2015. We document a significantly negative relationship between board gender diversity and cash holdings. We also find a strong negative effect of female independent directors consistent with monitoring function. Moreover, in accordance with the critical mass theory, we find a negative effect of female directors’ presence and voice on cash holdings. Our findings are robust to alternative econometric specifications, alternative measures of cash holdings and corporate governance, difference‐in‐differences, propensity score matching, and two‐stage least squares. This study offers useful insights into the current global debate on gender diversity and its implications for 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.     

Corporate tax cuts,merger activity,and shareholder wealth

We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the U.S. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.     

Trade credit and company performance during the 2008 financial crisis

We investigate whether the 2008 financial crisis had an impact on companies’ trade credit, and whether changes in trade credit mitigated the crisis’s impact on firm profitability. We document that the availability of trade credit decreased, and that this decline is more pronounced, the higher the companies’ pre‐crisis reliance on short‐term debt. We further report evidence that the redistribution hypothesis holds during crisis periods. Finally, we show that the crisis had a negative impact on company performance, but that this impact was lower (greater) for firms that report an increase in trade receivables (payables) in crisis compared to pre‐crisis periods.     

Corporate performance, managerial ownership and endogeneity: A simultaneous equations analysis for the Athens stock exchange

This paper investigates the relationship between managerial ownership and firm performance by considering the endogenous nature of the ownership variables. We conducted our analysis by applying a simultaneous equations framework. We empirically controlled the direction and significance of this relationship, using a panel comprised of 146 firms quoted on the Athens Stock Exchange between 2000 and 2004. The main findings of our analysis indicated that when managerial ownership is treated as endogenous, there is a positive impact on corporate value. Given the particularly high degree of managerial ownership that is observed in the firms listed in the Athens Stock Exchange, we argue that the estimated positive relationship can be mainly explained by the existing high levels of managerial ownership.     

Approval of shareholder-sponsored proposals: Evidence from Canada

Little is known about shareholder voting at firms incorporated outside of the United States. Proposals sponsored at such firms and the voting patterns and factors associated with these proposals should conceivably be similar to those in the U.S. if the legal and governance structures of the countries are similar. We examine 264 shareholder proposals sponsored at Canadian firms between 2001 and 2005 in order to determine if differences created by the Canadian governance system, being more voluntary than that of the U.S. system, lead to differences in shareholder voting. We find many similarities between voting at the Canadian firms and those found in the literature for their U.S. counterparts, including some types of frequently submitted proposals and factors impacting the level of shareholder approval. However, unlike the concurrent literature on U.S. firms, we find very few majority approved proposals and a much lower overall level of affirmative voting returns.     

Pyramidal ownership and the creation of new firms

We study the role of pyramidal ownership structures in the creation of new firms. Our results suggest that pyramids arise because they provide a financing advantage in setting up new firms when the pledgeability of cash flows to outside financiers is limited. Parent companies supply inside funds to new firms that, due to large investment requirements and low pledgeable cash flows, cannot raise enough external financing. The financing advantage of pyramidal structures is pervasive in many countries, exists regardless of whether new firms are set up by business groups or by smaller organizations, and is an important underpinning of entrepreneurial activity.