Jensen(1986)은 기업의 이익을 어떻게 사용할 것인지가 주주와 경영진 사이에 서 발생하는 이해상충의 핵심임을 강조 한 바 있으며, 이를 감안한다면 과잉 현 금보유(excess cashholding)가 주주 보호 나 기업지배구조가 열악한 경우 더 많이 관찰될 가능성이 있음을 강조하였다. 이 는 주주 보호나 기업지배구조가 열악할 경우 경영진이 기업이 보유하고 있는 현 금성 자산을 자신의 사적이익 등을 위해 무분별하게 사용할 개연성이 존재하기 때문이다. 따라서 기업지배구조가 부실 한 기업일수록 이러한 대리인 문제의 발 생으로 인해 현금보유가 증가할 수 있다. 최근 논문에서는 소액주주 보호 및 지배 구조 등이 기업의 현금보유와 어떠한 관
Several empirical studies have examined the factors that affect corporatecash holdings. Majority of the existing work is largely carried in the context of USA (Kim et al., 1998; Opler et al., 1999; Dittmar & Mahrt-Smith, 2007; D’Mello et al., 2008; Harford et al., 2008; Bates et al., 2009; Duchin, 2010; Kim et al., 2011). Some of the literature in this area has examined this issue in cross-country and comparative perspectives. For example, Ferreira and Vilela (2004) examine a sample of EMU countries, whilst Pinkowitz and Williamson (2001) investigate large industrial companies in Germany, USA and Japan. Moreover, Guney et al. (2007) examine the cashholding activities in a number of developed nations including France, Japan, UK, the USA and Germany. Ozkan and Ozkan (2004) use a sample of UK firms to examine the factors affecting corporatecashholding in the UK. Overall, it is worth noting that most of the studies put the focus on the cash holdings levels in the developed countries. While the developed countries generally own favourable market environment and mature capital markets, the unique economic problems are presented in the developing and emerging economies. Thus, the research findings on developed countries may not be generalized to a wider world. As the largest developing country in the world, Chinese context offers an interesting opportunity to explore the role of corporate governance, and ownership structure in explaining corporatecash holdings. Particularly, in the recent years, Chinese corporatecashholding levels has mounted to an abnormal level. Thus, through using the sample period from 2012 to 2016, we provide recent empirical insights about the determinants of corporatecash holdings in the Chinese context.
No doubt different firms in different countries would hold different amount of cash and make different decisions of cash holdings, as expected and in accordance with previous studies such as that of Booth et al. (2001). However, from an international level, this study has an important implication since it shows that even if emerging markets such as that of China differ in various financial, legal and governmental contexts, yet they share the same financial determinants and firms in such countries follow almost similar patterns in managing their cash holdings when compared with their counterparts of firms in developed markets such as those in US and in UK.
The corporatecashholding has an important role in the financial decision of the companies. The firm or economic institutions usually keep an optimal level of cash in order to avail any growth opportunities and projects with positive NPV (Opler et al., 1999). As per the literature various studies have been con- ducted on the determinants of cash holdings and it is proved that size, leverage, investment opportunities, net working capital, corporate governance have con- siderable consequences on cashholding but the effect of firm structure on cashholding is largely ignored by the researchers while analyzing cashholding of firms (Subramaniam et al., 2011). Thus, the current study focused whether the firm structure (whether diversified or focused) effect cashholding or not. The findings of this study will helpful for the diversified and focused firms to analyze and revise their capital structures and cash holdings level and improve it more. This study also examine to see the level of cashholding for both firms (diversi- fied or focused firms) and our findings will help them to differentiate and know the differences. The findings of the this study is not only contribute to current literatures and the settlement of the still ongoing corporatecashholding debate, but could provide useful implications on the influence of firms structures on cashholding in selected industries of Pakistan. This study is helpful for policy- makers and research scholars to examine the firm structure on corporatecashholding from different prospective such as by using adjusted Cashholding for different industries. We also contribute to scarce literature on the impact of firms structure on corporatecash holdings with regard diversified and focused firms. In Section 2, the theoretical literatures about theories related to our study and previous literature is presented. The methodology and descriptive statistic are presented in Section 3. Section 4 we presents the data analysis for of all mod- els and findings. Section 5 concludes and recommendations.
In addition, elements that will be explained in this chapter are the overview of the importance and determinants of corporatecash holdings, the problem statements, analyzing the research questions, discussion on the objectives of the research to be achieved upon the completion of research paper and explanation on the rationalization of the significance of the study. Finally, review on the structure of research paper is developed.
increase productivity and investments, which is possible when enough capital is available to the firms. Capital has been found to be the single most important factor in firm growth in Africa (Abor, 2008). It is therefore important that firms avail themselves of the information about, and knowledge of, capital structure issues. However, lack of research in this area, coupled with very little research into R&D by African firms, has made it difficult for firms to have the necessary information. This study therefore provides that information about the determinants of capital structure at both the firm level and the country level to help firms in their capital structure decisions. The study was also motivated by trends in the effects of shocks and risks at specific times. Therefore, the growth and performance of firms in African countries would be made known to investors and also provide a thorough understanding of how country and firm factors influence capital structure (leverage) decisions in African countries. Since most countries in Africa aim at attracting direct foreign investment and also at encouraging investors to invest in firms in Africa, the trends will provide complete
Reviewing the empirical evidence suggests directions for future research. First, the interplay between cashholding theories is not well understood. The importance of these theories changes according to a firm’s environment and characteristics. Life-cycle models offer a potential way to understand the link between different theories and their changing relevance. Such models investigate how the level of cash and the determinants of the cash stock change over a firm’s life, i.e., at different stages of the life cycle. Each stage of a firm’s life cycle features different firm and environmental characteristics. This may offer a way to analyze changes in the importance of underlying theories as well as links between these theories over different stages of a firm’s life. Second, country- and industry-level characteristics, such as shareholder protection, affect the association between firm-level characteristics and cash holdings. Current research focusses either on country- or firm-level characteristics, ignoring their interactions. Investigating such interaction effects may aid understanding of how specific country-level characteristics affect the level of cash. This would mean, for example, not only investigating whether firms hold more cash in an environment of strong investor protection but also studying how the association between firm characteristics and the level of cashchanges when investor protection is strong. Third, the persistence of cash has been shown to increase the market value of cash holdings. Thus, analysis of the determinants of cashholding persistence should be pursued in future research, as it offers an opportunity to identify instruments that induce value- increasing cash policies. Another task is to separate the effect of ambiguity aversion from the association between R&D expenditures or, alternatively, information asymmetries and the level and the value of cash holdings. The remainder of this paper is structured as follows: Section 2 discusses the theoretical basis of cashholding research. Section 3 reviews the empirical cashholding research. I conclude in section 4.
Our study contributes to the extant literature in four ways. First, complementary to existing literature at a macroeconomic level (e.g. Chang et al., 2015; Chen et al., 2017), the empirical evidence provided in this paper deepens our understanding on the impacts monetary policies on corporate investment decision-making at a microeconomic level. Second, existing literature has shown the effects of tightening monetary policy on corporate investment by reducing credit supply (Morck et al., 2013) and constraining corporate finance (Huang et al., 2012). This paper offers novel and additional evidence on the role played by cashholding to mitigating the adverse effects of monetary tightening by considering the variation at both firm (e.g. state-ownership) and regional level (e.g. regional financial development). Such evidence provides stronger implications to Chinese businesses who rely more heavily on internal retained profits to finance investment in an economic transition period (Allen et al., 2005). Third, recent studies have shown that the impacts of monetary policies on economies have become reduced because of the development of shadow banking market (Chen et al., 2017). To complement to existing studies on external determining factors, this paper focuses on the role played by corporate internal sources of finance in responding to monetary policy changes. Finally, this paper investigates the mechanisms and consequences (e.g. investment efficiency) of how cashholding mitigates the effects of monetary tightening. This is an addition to the recent development in China economic research on how one corporate finance decision making affects another.
The theoretic part in this paper differs from Gamba and Triantis (2008) and Asvanunt et al. (2007) on several fronts. First, this work focuses on whether cash has any significant economic value in case it does not serve as a liquidity buffer reducing bankruptcy risk. Doing so, I am able to provide new insights regarding the valuation of cash and the impact of cash holdings on corporate investment policy. Specifically, it is shown that the value of cash is mostly negatively related to volatility. The intuition is that cash only has value in good states of nature, i.e. when the firm is doing well. Saving essentially reduces the future strike price of the capacity expansion option such that, compared to the case of full external financing, the growth option is more in the money. As it turns out, for most parameter values an increase in volatility is less valuable in case the firm saves or, put differently, when the option is more in the money. Given that a substantial number of firms is all-equity financed and has huge cash holdings, this result is also of practical relevance. On the other hand, the paper also shows that optimal saving policy leads to a delay in the firm’s investment policy. Again, because saving provides the firm with an option to exercise the project at a lower strike price in the future, a value maximizing firm is willing to invest later even if it faces the same current cost of external financing. Second, contrary to both papers I assume quadratic agency costs of free cash flow to account for the fact that managers want to engage in empire building in the case of high retention which in turn induces costly monitoring activities by shareholders. The assumption of convex agency costs considers the fact that monitoring gets increasingly expensive the more funds are retained within the firm. Besides, it also implies an interior solution for optimal corporate saving policy for which I derive a concrete expression. Third, I am able to derive a closed-form solution for a simplified version of the model which is useful for better understanding the negative relation between the value of cash with respect to volatility. Finally, this work also includes an empirical section which tests the main implications of the model.
We compare TNK-BP Holding with Russian largest integrated oil companies, as well as international oil and gas majors. We employ EV/EBITDA, P/E and EV/Proven Reserves multiples. We use our in-house estimates for covered Russian oil and gas companies’ multiples and Bloomberg consensus projections for other companies. We note that on all three used multiples TNK-BP looks fairly valued compared to its Russian peers and on 2012 and 2013 multiples is traded with a premium or discount not exceeding 10%. Moreover, it is traded in line with international majors on EV/EBITDA multiple and has a discount on P/E and EV/Reserves to international majors mainly. We consider multiples comparison as an indirect support to our opinion that TNK-BP shares has pretty limited upside. At the same time we note that the major part of TNK-BP earnings is distributed as dividends, which could justify a premium for TNK-BP shares, that is why we believe TNK-BP shares have valuation potential.
Keynes (1936) states that the demand of holding enough cash is decided by the transaction, precautionary and speculative motive. Furthermore, Myers and Majluf (1984) with pecking order theory indicates that issuing new equities for the firm is very costly because of the information asymmetries. Therefore, the enterprises finance their investments primarily with internal funds than having the difficulty in finding external funds from the debt or issuing new shares. Moreover, trade off theory (Myers, 1977) states that the optimal cashholding brings more profit due to the fact that the firms can take an advantages of investment opportunities for the corporations. Equally, cashholding has a strong effect on firm value and the firm value reduces when the level of cash exceed the optimal level (Martinez-Solano et al., 2013). However, the Free Cash Flow Theory (Jensen, 1986) reveals that the conflicts increase between managers and shareholders when the companies keep more cash. The previous studies support that the reduction of excess cashholding contribute to increasing the firm value and the change of excess cash react differently in determining firm value (Lee and Powell, 2012; Kusnadi and Wei, 2011; Harford et al., 2008; Derek and Marc, 2014). The firm value is measured by the Tobin’s Q (Martinez-Solano et al., 2013; Dahya et al., 2008). In
underinvestment in value-increasing in favor of managerial perquisites, or overinvestment in value- reducing projects (Jensen, 1986). Evidence of this is shown in research by Blanchard, Lopex-de-Silanes and Schleifer (1994). They find that firms who have sudden influxes of large cash from a won or settled lawsuit tend to invest in lower-value investment opportunities. Agency problems of free cash flow are likely to develop in large and more established firms and result in an increase of cash holdings (Bates, Kahle and Stulz, 2009). Moreover, as discussed by Mikkelson and Partch (2003), excess “financial slack” provides an opportunity to escape the scrutiny or discipline of outside financing. Similarly, Harford, Mansi and Maxwell (2008) find that weakly-controlled managers are more apt to spend cash more freely on capital expenditures.
For each month from July of year t to June of year t + 1, we estimate the average coefficients from Fama and MacBeth cross-sectional regressions of the monthly percent excess returns on the cashholding variables plus the control variables for the Low, High, and High-Low transaction costs or short selling costs subgroups. The cashholding variables are cash-to-assets ratio (CH) and excess cash measure (ECM ). The control variables are size (ln(M V )), book-to-market (ln(B/M)), and momentum (M OM). ln(M V ) is the natural logarithm of market capitalization calculated with information available at the end of June of year t. ln(B/M) is the natural logarithm of the ratio of the book value of equity for the fiscal year ending in year t − 1 divided by market equity at the end of December of year t − 1. M OM is the cumulative compounded stock returns of the previous 6 months from June of year t to May of year t + 1. We use three transaction costs measures of the quoted bid-ask spread (BA, %), price impact (P I, 10 6 ), and dollar volume (DV , $000); and the short selling costs measure of the percentage of institutional ownership (IO). At the end of each month of year t, we sort stocks into three terciles based on their BA, P I, DV , and IO. Low represents the bottom subgroup. High represents the top subgroup and High-Low represents the difference between the top and the bottom subgroups. The corresponding t-statistics based on Newey and West (1987) standard errors with six lags are in parentheses. The sample period covers from July 1972 to June 2011.
The model is designed to be tractable so that several results can be derived analytically. It suggests that liquidity shocks can explain the negative comovement between employment and the corporatecash ratio. A reduction in external liquid- ity generates two e¤ects. On the one hand, lower liquidity reduces the …nancial opportunities of …rms and depresses labor demand. On the other hand, the reduc- tion in external liquidity makes the production process more intensive in cash to ensure that wages are fully …nanced. Firms assets are then tilted towards cash. Combining these two e¤ects implies that the cash ratio increases while employ- ment declines. This analysis points to the crucial role played by the tightening of liquidity conditions in the aftermath of the Lehman crisis. While no initial sharp reduction in credit supply was observed during the recent …nancial crisis, …rms experienced a signi…cant deterioration in their expected liquidity conditions. For example, Gilchrist and Zakrajsek (2012) argue that banks cut the existing corpo- rate lines of credits during the crisis. 1 Also, short-term loans to business …rms
The extant literature has indicated the existence of various factors that affect firms’ cor- porate cash holdings, including but not limited to cash flow ratio, growth opportunities, tangibility, size, leverage, volatility of cash flows, working capital, and capital expenditure. These factors are mostly viewed in perspective of two widely used theories in finance literature, namely the theories of pecking order and trade-off. According to the trade-off theory, firms have target cash holdings based on the marginal benefits and costs of the holdings. Firms hold cash at the target level while considering marginal benefits. There- fore, most firms have a target cash holdings level. In contrast, the pecking order theory postulates that firms have no such target levels; however, they maintain excess cash to use as a buffer between retained earnings and investment needs. Firms thus hold cash to avoid external financing when retained earnings cannot adequately finance new investments (Opler et al. 1999; Uyar and Kuzey 2014). Based on these theories and the extant litera- ture, we identify the following factors that can affect cash holdings.
Cashholding is defined as cash held by the company as cash in hand or available for investment in physical assets and distributes them to investors. Cash is the most liquid asset and is a measure of the company's ability to pay its obligations on time (Gill and Shah, 2012). Cashholding is an important thing because it can maintain the liquidity of the company, so as to make the company able to pay off the obligations on time even if when the bad situation hit the business activities that run. To increase sales and profits, the company also needs to build cash supplies by ensuring that cash movements create a positive cash flow situation overall. Thus, cash can be said to be an important component that enables the company to survive and prosper. Cash can consist of cash on hand and funds deposited in the bank in the form of deposits and checking accounts (Adiprawiro, 2015).
Finally, regulation may also reduce blockholders’ incentives to monitor the boards of financial institutions. In general, in an environment where regulators are active, blockholders are passive. In an unregulated environment, blockholders typically invest in the shares of undervalued companies. They then gain a seat (or seats) on the board through proxy contests and exert pressure on management to restructure corporate assets and/or change corporate payout policy. In addition, blockholders often sue the board, and tarnish outside directors’ reputations in order to achieve their objectives. Blockholders are also more willing to invest capital in a share of the company, as well as other resources, if they can get a fair assessment of the value of the company and face little or no opposition on (quick) asset restructuring. Conversely, a regulatory environment, at times, may interfere with the information production and acquisition process, as disclosure of some information may be perceived by regulators as potentially causing bank runs. 16 Blockholders are also more unlikely to gain seats through proxy fights and acquire additional information about a regulated firm. Moreover, even if blockholders can influence management to restructure its assets, the restructuring may take some time in the banking industry. Thus, it is likely that blockholders’ incentives are affected by regulation, implying that block ownership of firms in the banking industry should be less concentrated than it is in unregulated environments.
Overall, this paper contributes in two main areas. First, the study adds to the burgeoning literature on corporatecash holdings. By providing compelling evidence that cash policy encompasses a substantial product market dimension, the analysis broadens our understanding of the implications of corporatecash reserves. Prior research depicts a dark side of cash holdings by arguing that entrenched managers use them in ways that destroy value; see Harford (1999), Dittmar and Mahrt-Smith (2006), and Harford, Mansi, and Maxwell (2006). In contrast, other studies argue that cash reserves can benefit shareholders by allowing firms to take efficient advantage of their growth prospects; see Opler, Pinkowitz, Stulz, and Williamson (1999), Mikkelson and Partch (2003), and Haushalter, Klasa, and Maxwell (2006). The results in this paper add significantly to this line of research by showing that cash reserves bring real benefits. Corroborating the precautionary nature of cash policy, the analysis confirms that cash enables firms to finance value-enhancing product market actions. More specifically, by underlining the importance of cash to product market success, the findings shed light on one way in which the hoarding strategy turns out to be beneficial. The study also illustrates that a firm’s cash reserves significantly affect rivals’ actions, which suggests that cash policy might also encompass a valuable signaling dimension. 8 Taken as a whole, the documented strategic effect of cash appears substantial. As such, it needs to be taken into account when assessing the soundness of firms’ levels of cash and whether and how investors should be concerned.
Any panel data study might suffer from a survivorship bias, for some companies are delisted during the investigation period. Mergers and ac- quisitions are the most likely cause of a delisting. It is possible that the changing number of cross-sectional units has an impact on the empiri- cal outcome; therefore, we distinguish between ﬁ rms that are listed during the whole investigation period and those that are listed later or delisted. The panel VAR (Eq. (2)) is re-estimated for the two subgroups of ﬁ rms, and the results do not differ qualitatively. An alternative meth- od is to include the number of years listed as an additional variable of the panel VAR and analyse whether ﬁ rms with a longer listing history exhibit different levels of the four endogenous variables. The number of years listed does not in ﬂ uence cashholding nor liquidity needs, whereas trade credit and short-term bank ﬁ nance are signi ﬁ cantly affected, albeit the magnitude of in ﬂ uence is very low with coef ﬁ cients of 0.0002 and 0.0008 respectively. The alleged survivorship bias does not alter our ﬁ ndings, and the listing period has only a minor effect on trade credit and short-term bank ﬁ nance. This suggests that the period of listings has a negligible impact on cashholding in contrast to Bates et al. (2009). To illustrate the potential survivorship bias, Fig. 2 plots predicted cash ratios for surviving and non-surviving ﬁ rms. As expect- ed, non-surviving ﬁ rms exhibit on average lower cash-ratios compared to surviving ﬁ rms; however, the difference amounts to 0.7 percentage points from 1991 to 2008, which is negligible. Moreover, the difference seems to be stable over time; thus, an alleged survivorship bias cannot explain the increase in cashholding.
Theorem 2 shows that precautionary cashholding occurs if debt holders im- pose financial constraints such that s + c < ν. By restricting access to finance, debt holders force equity holders into liquidity risk. To mitigate liquidity risk, equity holders select precautionary cashholding, which reduces insolvency risk. Precautionary cashholding can be positive even if the interest rate on short-term finance is equal to zero, in contrast to cashholding motivated by the transaction motive. Based on Theorem 1, the price mechanism is unable to reduce demand for short-term financing as long as interest rates are not su ffi ciently high. The- orem 2 confirms that selecting optimum precautionary cashholding maximizes shareholder value and is therefore a rational choice for equity holders. The fol- lowing section addresses the question of whether credit rationing, which leads to precautionary cashholding, is also a rational choice for the debt holder.