Does economic policy uncertainty raise corporate precautionary cash holdings? Evidence from China

Using China as the research setting, this paper investigates the relationship between economic policy uncertainty and corporate precautionary cash holdings. Empirical results show a U-shaped relation between economic policy uncertainty and corporate precautionary cash holdings. Empirical analysis, in terms of ownership structure, firm size, corporate competitiveness and geographical location, further shows that (i) the effects for economic policy uncertainty in both state-owned and non-state-owned enterprises are significant, but the effect is stronger for state-owned enterprises; (ii) such significant effect is also found more strongly in small and medium-sized enterprises and highly competitive enterprises; and (iii) the effects for eastern, central and western China are all statistically significant, but the effect is strongest for eastern China.     

Are female top executives more risk-averse or more ethical? Evidence from corporate cash holdings policy

This study examines the impact of gender in the C-Suite on corporate decision making. In particular, we investigate the influence of the Chief Financial Officer (CFO)’s gender on the agency costs of free cash flow. We document that female CFOs reduce cash holdings in firms with excess cash, which should alleviate the agency conflict arising from managerial discretion. We also find that female CFOs at firms with surplus cash increase distributions to shareholders in the form of dividends. The empirical evidence also shows that the reduction in cash does not lead to suboptimal investment policies. Of the two competing hypotheses – gender-ethics hypothesis and risk-aversion hypothesis—these results are consistent with the view that female CFOs undertake more ethical but not more risk-averse decisions than their male counterparts. Our results are robust to a battery of robustness tests.     

Does real flexibility help firms navigate the COVID-19 pandemic?

Building on the investment-based asset pricing framework, we show that firms' ability to timely scale down their operations reduces the sensitivity of their equity value to large adverse productivity shocks. Using U.S. data in the times of the COVID-19 pandemic, we provide empirical evidence consistent with our model's predictions. Real flexibility curbs losses in firm value and reduces return volatility, especially for firms with high book-to-market or high COVID-19 exposure, consistent with the idea that the benefits of real flexibility are associated primarily with contraction options during the COVID-19 crisis. Our analysis shows that real flexibility provides incremental and complementary protection beyond financial flexibility. Besides its impact on stock prices, real flexibility also helps firms sustain earnings during 2020, compared with 2019 when the pandemic had not struck. Our work demonstrates that real flexibility is an important tool for corporate managers in navigating episodes of disasters.     

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.     

Does CSR matter in times of crisis? Evidence from the COVID-19 pandemic

The debate over how firm stakeholder engagement is tied to preserving shareholder wealth has received growing attention in recent years, especially in the wake of the COVID-19 crisis. Against this backdrop, we examine the relation between corporate social responsibility (CSR) and stock market returns during the COVID-19 pandemic-induced market crash and the post-crash recovery. Using a sample of 1750 U.S. firms and two major sources of CSR ratings, we find no evidence that CSR affected stock returns during the crash period. This result is robust to various sensitivity tests. In additional cross-sectional analysis, we find some supporting evidence, albeit weak, that the relation between CSR and stock returns during the pandemic-related crisis is more positive when CSR is congruent with a firm's institutional environment. We also find that Business Roundtable companies, which committed to protecting stakeholder interests prior to the pandemic, do not outperform during the pandemic crisis. We conclude that pre-crisis CSR is not effective at shielding shareholder wealth from the adverse effects of a crisis, suggesting a potential disconnect between firms' CSR orientation (ratings) and actual actions. Our evidence suggests that investors can distinguish between genuine CSR and firms engaging in cheap talk.     

What determines cash holdings at privately held and publicly traded firms? Evidence from 20 emerging markets

We provide one of the first large sample studies to examine how firm-level characteristics and national-level institutions affect cash balances in privately held and publicly traded firms and investigate whether the determinants of cash holdings for both types of firms are similar. Using panel analysis for data we analyze a sample of 9453 private versus 7319 public firms and 104,571 firm-year observations from Central and Eastern Europe over the period 2001–2010. We first show that privately held firms tend to hold more cash than publicly traded firms. Second, firms in more market-oriented countries, according to transition indicators, have larger cash reserves. Third, the same determinants of cash balances are relevant for both privately held and publicly traded firms regardless the stage in the transition to capitalism.     

How do banks resolve firms’ financial distress? Evidence from Japan

The main purpose of this paper is to investigate how banks resolve firms?? financial distress in Japan. Our results show that distressed firms that have more unsecured bank debt are more likely to restructure debt successfully out of court. Second, private debt restructuring is conducted during the year in which a financially distressed firm would be compelled to report negative net worth because of substantial accounting losses if no debt restructuring plans were implemented. Third, firms that are already in a negative net worth situation are more likely to receive debt forgiveness and/or debt-for-equity swaps. Finally, both the 1-year-lagged total liabilities-to-assets ratio and accounting losses are positively related to the private workout level. These results suggest that banks resolve firms?? financial distress in shareholders?? and creditors?? interests. We argue that, along with bankruptcy laws, the stock exchange rules and the fact that banks are allowed to hold shares in these firms affect the resolution of firms?? financial distress.     

Why do firms save cash from cash flows? Evidence from firm‐level estimation of cash–cash flow sensitivities

We construct firm‐level estimates for the cash flow sensitivity of cash (CCFS) by modelling heterogeneous slopes in reduced‐form cash equations. This approach allows identifying firms with a high, low or even negative savings propensity. We find that high CCFS firms have higher income variation, suggesting cash buffering is triggered by income shocks. High CCFS firms do not suffer from financing constraints measured by a wide selection of indicators. Our results suggest that the CCFS is not an adequate indicator to capture financing constraints. Rather, a higher CCFS indicates smoothing of income fluctuations by installing a cash buffer that successfully prevents future income shortfall.     

Does corporate social responsibility protect shareholder value from the shock of COVID-19? Evidence from China

Our study examines whether and how increased engagement in social responsibility activities by a firm affects movements in its stock prices during the COVID-19 public health crisis, which is regarded as an exogenous shock to economic ties between focal firms and their customers, employees, and suppliers. We find that corporate social responsibility has an inverted U-shaped relationship with shareholder value. The nonlinear relationship is more dominant at firms with higher cash-flow constraints and weaker cost-adjustment capabilities. Our research also generates meaningful implications for business practices.     

Do REITs use cash reserves efficiently? Evidence from corporate acquisitions

We examine the combined impact of corporate governance and excess cash holdings on the propensity of firms to become bidders and engage in value destroying acquisitions. We focus on the REIT market, due to its unique characteristics caused by regulation and the nature of the industry. The lack of active real estate takeover market should lead to entrenchment and exacerbate agency costs. However, given the mandatory high cash payout for REITs, the absence of takeover market should not cause concerns to shareholders. Our analyses reveal that unlike conventional firms, cash-rich REITs are not more likely to become acquirers and acquisitions by cash-rich REITs are not value decreasing. However, similarly to industrial firms, REITs with higher excess cash and lower insider ownership are more likely to become bidders. We interpret our results to be consistent with the hypothesis that agency problems are less severe in real estate and investors are not averse to use of excess cash by REIT managers on intra-industry acquisitions.     

How does the COVID-19 pandemic shape the relationship between Twitter sentiment and stock liquidity of US firms?

Using a new investor sentiment metric derived from Twitter, this paper examines how the pandemic's death rate influences the impact of investor sentiment on stock liquidity. Recent literature remains inconclusive regarding the effect of COVID-19 information and investor sentiment on financial markets. Using panel smooth transition regression (PSTR) for daily data on 338 listed firms in the S&P500 from January 2, 2020, to May 26, 2021, the findings reveal that the impact of Twitter sentiment on stock liquidity is nonlinear and changes over time and across firms in the function of the pandemic's death rate in the US. The results exhibit a threshold level of 4.32%, above which investor sentiment boosts stock liquidity. The speed of the transition from low to high pandemic death rate regime occurred abruptly rather than smoothly. This translates to severe changes in investor perception and demonstrates that investors are rapidly updating their beliefs during the COVID-19 outbreak.     

Does technology-seeking OFDI improve the productivity of Chinese firms under the COVID-19 pandemic?

This paper empirically investigates the impact of technology-seeking outward foreign direct investment (OFDI) on firms' productivity under the influence of negative external shocks, taking as a sample the investment data of Chinese firms before and during COVID-19. The results show that technology-seeking OFDI improves productivity, but not under negative external shocks. The dampening effect of such shocks is more significant when the host country is a developed country and in firms with multiple branches. Technology-seeking OFDI particularly improves the productivity of research and development and processing firms, and (among the productivity measures tested) most prominently affects total factor productivity.     

State ownership,soft-budget constraints,and cash holdings: Evidence from China’s privatized firms

We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 2000 to 2012. We find that the level of cash holdings increases as state ownership declines. For the average firm in our sample, a 10 percentage-point decline in state ownership leads to an increase of about RMB 55 million in cash holdings. This negative relation can be attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese financial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and find that the marginal value of cash increases as state ownership declines. The next RMB added to cash reserves of the average firm is valued at RMB 0.96 by the market. The marginal value of cash in firms with zero state ownership is RMB 0.36 higher than in firms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to their lower value of cash.     

Do corporations learn from mispricing? Evidence from takeovers and corporate performance

In this article we form the simple prediction that mispricing encourages traders to collect costly information that guides managerial decisions at corporate level. Our findings support this prediction based on evidence derived from both the US market for corporate control and the overall variation in aggregate corporate profits. The trading activity in response to the temporary mispricing of the merging companies provides useful information that leads to the design of high-synergy deals. Such synergies are reflected in an increase in the announcement period acquirer abnormal returns and are not reversed in the long-run. At the market-wide level, our results suggest that the growth in the overall stock trading volume in response to market mispricing is associated with high future corporate profit growth. Overall, after controlling for several economic and financial conditions, the temporary mispricing in a developed and generally efficient stock market stimulates informative trading, ultimately leading to value- and performance-enhancing corporate decisions.     

How do firms react to the prohibition of long-lived asset impairment reversals? Evidence from China

New Chinese Accounting Standards (CAS) released on February 15, 2006, prohibit the reversal of long-lived asset impairments, effective for reporting periods beginning January 1, 2007 and later. This development in the Chinese market provides a unique experimental setting to directly investigate how firms react to the ban on previously-allowed long-lived asset impairment reversals, especially firms that use impairment charges as “cookie jar reserves.” By contrasting write-off recognition and reversal across the pre- and post- new CAS announcement regimes, we show that firms listed on Chinese stock exchanges recognized less impairment charges during the “transition” period—after announcement of the new standard and before the effective date—than in pre-announcement periods. Meanwhile, firms with substantial previous write-downs reversed more impairment charges to achieve their earnings targets in the transition period. The new CAS also constraints “big bath” reporting by loss firms. As US GAAP prohibits these reversals and IFRS allows them, our empirical evidence depicts firms’ possible reactions in other regimes contemplating doing away with such reversals.     

What can we learn about the market reaction to macroeconomic surprise? Evidence from the COVID-19 crisis

We investigate the impact of macroeconomic surprise and uncertainty on G7 financial markets around COVID-19 pandemic using two real-time, real-activity indexes recently constructed by Scotti (2016). We applies the wavelet analysis to detect the response of the stock markets to the macroeconomic surprise and an uncertainty indexes and then we use NARDL model to examine the asymmetric effect of the news surprise and uncertainty on the equity markets. We conduct our empirical analysis with the daily data from January, 2014 to September, 2020. Our findings indicate that G7 stock markets are sensitive to the macroeconomic surprise and uncertainty and the effect is more pronounced at the long term than the short term. Moreover, we show that the COVID-19 crisis supports the relationship between the macroeconomic indexes and the stock prices. The results are useful for investment decision-making for the investors on the G7 stock indices at different investment horizons.     

How do labor adjustment costs affect corporate tax planning? Evidence from labor skills

Labor adjustment costs (LACs) are a broad concept and involve costs incurred to search, hire, train, retain, and fire employees. Using the level of labor skills as a proxy for LACs, I find that higher LACs are associated with greater tax savings. The effect is stronger for firms facing more intense competition, and firms in states that strengthen labor protection, but weaker for firms in states that restrain labor mobility. High-LAC firms avoid taxes in order to generate precautionary cash. Collectively, the evidence indicates a significant influence of frictions in labor markets (i.e., LACs) on corporate tax planning behavior.     

The taxman cometh: Does tax uncertainty affect corporate cash holdings?

We examine whether firms hold more cash in the face of tax uncertainty. Because of gray areas in the tax law and aggressive tax avoidance, the total amount of tax that a firm will pay is uncertain at the time it files its returns. The tax authorities can challenge and disallow the firm’s tax positions, demanding additional cash tax payments. We hypothesize that firms facing greater tax uncertainty hold cash to satisfy these potential future demands. We find that both domestic firms and multinational firms hold larger cash balances when subject to greater tax uncertainty. In terms of economic significance, we find that the effect of tax uncertainty on cash holdings is comparable to that of repatriation taxes. Our evidence adds to knowledge about the real effects of tax avoidance and provides a tax-based precautionary explanation for why there is such wide variation in cash holdings across firms.     

Do corporate governance mechanisms matter for cash holdings and firm value?

This paper examines the relationships between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia. Firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance. The results support the flexibility hypothesis in that an increase in agency conflicts between managers and minority shareholders leads to entrenched managers having more discretion to hoard cash reserves. In addition, the incremental value of holding excess cash is shown to be negative for firms with a single leadership structure, firms with a pyramidal ownership structure, as well as family-controlled firms. The discounts associated with these firms may reflect investors’ recognition of the possibility of managerial entrenchment.     

How do corporate websites contribute to the information environment? Evidence from the U.S. and Taiwan

We study corporate website disclosures in the U.S. and Taiwan, two countries with different regulatory and market environments, to provide insights into the uniformity of website content and its contribution to the information environment. We observe significant variation in content both within and between the two countries. U.S. firms with higher analyst following tend to create more transparent financial information environments and provide disclosures that are complementary to analysts’ analyses through their corporate websites. They also tend to provide easier access to investor relations (IR) services if analyst coverage is light or nonexistent. However, neither effect is true in Taiwan where the securities analysis industry is less mature. Individual investors have greater ownership share in U.S. firms with more information about IR services on their websites; however, their ownership share drops as financial disclosure on the firm’s website increases, consistent with institutions diluting individual ownership in firms with more transparency in financial reporting. In Taiwan, however, institutions dilute individual ownership share in firms with less financial information and more trading information on their websites. These results are consistent with Barber et al.’s (2009) findings that institutions find Taiwan firms that attract the aggressive, speculative trading of individuals to be extremely profitable investments. Website disclosures in both countries have some effect on the stock-price response to mandatory earnings releases, but their impact is greater in the U.S. Our findings indicate that website disclosures contribute to the information environment and are related to the degree of interest in the firm by sophisticated market participants. Thus, they provide insights to regulators of both countries as they seek to improve disclosure and “level the information playing field.”