We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about ...half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.
We examine the effect of chief executive officer (CEO) compensation incentives on corporate cash holdings and the value of cash to better understand how compensation incentives designed to enhance ...the alignment of manager and shareholder interests could influence stockholder-bondholder conflicts. We find a positive relation between CEO risk-taking (vega) incentives and cash holdings, and we find a negative relation between vega and the value of cash to shareholders. The negative effect of vega on the value of cash is robust after controlling for corporate governance, is stronger in firms with high leverage, is reversed for unlevered firms, and is not present in financially constrained firms. We also find that the likelihood of liquidity covenants in new bank loans is increasing in CEO vega incentives. Our evidence primarily supports the costly contracting hypothesis, which asserts that bondholders anticipate greater risk-taking in high vega firms and, therefore, require greater liquidity.
The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the ...average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.
The objective of this paper is to validate the existence of an extensively documented secular upward trend in corporate cash holding. To do this, we use the new data for Poland and review original ...datasets from
for the U.S. We find no trace of a trend for Poland and believe most trends for the U.S. come from the cash piling toward the end of the sample period. At best, the U.S. trend applies merely to small firms. We believe cash holding is a period-dependent time-varying variable which also depends on external shocks (e.g., the pandemic or tax regulations). We show that simple addition of macro data (GDP in our case) vastly improves models focused only on optimal cash holding and firm-specific characteristics. We call for a new three-stage approach to study corporate cash, in which micro considerations are complemented by macro data and external liquidity shock analysis.
Corporate reputation risk and cash holdings Hasan, Mostafa Monzur; Habib, Ahsan; Zhao, Ruoyun
Accounting and finance (Parkville),
March 2022, Letnik:
62, Številka:
1
Journal Article
Recenzirano
We investigate the extent to which corporate reputation risk influences cash holdings for US listed firms over the period 2007–2018. Our results show that firms having a high reputation risk hold ...significantly more cash. This documented relationship persists even after controlling for other determinants of cash holdings, including corporate social responsibility performance, explicitly. Using a series of analyses, we show that this relationship is not driven by endogeneity problems. Further, we find that the positive relationship between reputation risk and cash holdings is more pronounced for firms with more financing constraints and agency problems, and for growth, mature and shake‐out firms. In an additional test, we show that firms having a low reputation risk are associated with a higher marginal value of cash than are their high reputation risk counterparts. Overall, we provide robust evidence that reputation risk matters for corporate cash holdings.
The study examines the effect of low cash and debt (LCD) on corporate governance (CG) and whether country characteristics matter more for CG of LCD firms than other firms. The cash value approach can ...address this research question given the proven positive link between CG and cash value. A review of comprehensive firm-level data across 88 countries from 1996–2019 firmly reveals better CG for LCD firms than for other firms. Additionally, country characteristics prove to affect CG particularly for LCD firms. Specifically, CG of LCD firms advances when economic or financial development improves, financial system is market-based rather than bank-based, shareholder protection improves, or national governance strengthens. As for other firms, CG is less influenced by country characteristics. Overall, the study contributes to existing research by showing that LCD positively affects CG and LCD firms can better capitalize on favorable external environment to improve CG than other firms.
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•The study explores how low cash and debt (LCD) influences corporate governance (CG), factoring in country characteristics.•The results strongly indicate that CG is better for LCD firms than for other firms.•CG is more influenced by country characteristics for LCD firms than for other firms.•LCD firms can better capitalize on favorable external environment to improve CG than other firms.•The documented mutually reinforcing link between country characteristics and CG is strongly supported.
Information asymmetry and the value of cash Drobetz, Wolfgang; Grüninger, Matthias C.; Hirschvogl, Simone
Journal of banking & finance,
09/2010, Letnik:
34, Številka:
9
Journal Article
Recenzirano
This study investigates the market value of corporate cash holdings in connection with firm-specific and time-varying information asymmetry. Analyzing a large international sample, we test two ...opposing hypotheses. According to the pecking order theory, adverse selection problems make external financing costly and imply a higher market value of a marginal dollar of cash in states with higher information asymmetry. In contrast, the free cash flow theory predicts that excessive cash holdings bundled with higher information asymmetry generate moral hazard problems and lead to a lower market value of a marginal dollar of cash. We use the dispersion of analysts’ earnings per share forecasts as our main measure of firm-specific and time-varying information asymmetry. Extending the valuation regressions of Fama and French Fama, E.F., French, K.R., 1998. Taxes, financing decisions, and firm value. Journal of Finance 53, 819–843, our results support the free cash flow theory and indicate that the value of corporate cash holdings is lower in states with a higher degree of information asymmetry.
Academics, politicians, and journalists are often highly critical of U.S. firms for holding too much cash. Cash holdings are stockpiled free-cash flow and incur substantial opportunity costs from the ...perspectives of economics. However, behavioral theory highlights the benefits of cash holdings as fungible slack resources facilitating adaptive advantages. We use the countervailing forces embodied in these two theories to hypothesize and test a quadratic functional relationship of returns to cash measured by Tobin's q. We also build and test a related novel hypothesis of scale-dependent returns to cash based on the competitive strategy concept of strategic deterrence. Tests for both of these hypotheses are positive and show that returns to cash continue to increase far beyond transactional needs.
This paper examines whether the market reaction to investment announcements is conditional on company excess cash holdings. Cash may convey significant price‐relevant information about the future ...cash flows and strategic direction of a company. Using a sample of 4,256 corporate investment announcements by firms listed on the London Stock Exchange over the period 2005–2019, we show that market reactions to new company investment announcements are higher for firms with excess cash holdings. Furthermore, we provide evidence on the relationship between excess cash holdings and market valuation of various investment classes. The results reveal that organic investments are valued more highly by the market than inorganic investments, and the positive impact of excess cash holdings is more pronounced for the set of organic investment decisions, particularly product launches and R&D. Lastly, we evaluate how the motive for holding cash affects the market perception of excess cash holdings. The market views excess cash holdings as positive when cash is held as a result of high exposure to risk, high debt capacity, and high bid–ask spread. Market perception of excess cash holdings reverses from negative before to positive after the global financial crisis.
We examine how product market threats influence firm payout policy and cash holdings. Using firms' product text descriptions, we develop new measures of competitive threats. Our primary measure, ...product market fluidity, captures changes in rival firms' products relative to the firm's products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms' financial policies are significantly shaped by product market threats and dynamics.
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