Do macroeconomic conditions affect corporate cash holdings and cash adjustment dynamics? Evidence from GCC countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Moncef Guizani ◽  
Ahdi Noomen Ajmi
Keyword(s):  
Financial Constraints ◽  
Cash Holdings ◽  
Economic Conditions ◽  
External Financing ◽  
Macroeconomic Factors ◽  
Content Type ◽  
Macroeconomic Conditions ◽  
Gcc Countries ◽  
Cash Reserves ◽  
Corporate Cash Holdings

PurposeThis study aims to investigate the influence of macroeconomic conditions on corporate cash holdings in terms of their influence on the level of cash and the speed of adjustment of cash to target levels in the Gulf Cooperation Council countries (GCC).Design/methodology/approachThe study employs both static and dynamic regression analyses considering a sample of 2,878 firm-year observations drawn from stock markets in GCC countries over the 2010–2018 period.FindingsConsistent with the precautionary motive, the results show that GCC firms tend to accumulate cash reserves in weak economic periods. Evidence also reveals that the estimated adjustment coefficients from dynamic panel models show that GCC firms adjust more slowly toward their target cash ratio in periods of unfavorable economic conditions.Practical implicationsThis study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering financial constraints imposed by macroeconomic conditions. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of macroeconomic factors on firm's cash holding decision. Therefore, in an effort to increase the supply of external financing available to firms, policymakers may devise investment friendly environment by controlling macroeconomic factors.Originality/valueThis paper offers some insights on the macro determinants of cash holdings by investigating emerging economies. It explores the role of macroeconomic conditions on corporate cash holdings in terms of their influence on the costs of external funds and financial constraints.

Corporate cash holdings and firm life cycle: evidence from China

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ajid Ur Rehman ◽  
Tanveer Ahmad ◽  
Shahzad Hussain ◽  
Shoaib Hassan
Keyword(s):  
Life Cycle ◽  
Growth Stage ◽  
Emerging Market ◽  
Generalized Method Of Moments ◽  
Cash Holdings ◽  
External Financing ◽  
Strategic Choices ◽  
Content Type ◽  
Firm Life Cycle ◽  
Corporate Cash Holdings

Purpose The purpose of this paper is to investigate how corporate cash holdings changes across firm life cycle and how firms undergo heterogeneous dynamic cash adjustment as they advance from one stage to the next stage. Design/methodology/approach This study uses an extensive data set of 2,994 Chinese A-listed firms. The authors use generalized method of moments (GMM) and Fisher Panel unit root testing to investigate the targeting behavior of Chinese firms. Findings The uni-variate investigation reveals that firms in the growth stage exhibits the highest cash levels and firms in the decline stage report the lowest cash levels. As growth firms have high investment needs, they may require raising external capital to meet investment needs. To avoid the costly external financing, firms in growth stage tend to hold more cash. The GMM estimation reveals that along all the phases of firm life cycle there are evidences of trade-off behavior of corporate cash holdings. The authors report that adjustment rate increases as firms enters into the growth stage. Practical implications The findings provide both theoretical and practical insight to align cash policies with the available strategic choices along firm life cycle in an emerging market characterized by market imperfections. Originality/value The study is unique from the context that it is applying robust methodology to one of rarely investigated area in corporate cash policy. The peculiar Chinese study setting characterized by higher information asymmetry, high cost of external financing and heterogeneous access to financing sources provide theoretical and empirical underpinnings to investigate and gain insight about how corporate cash policy can be aligned with strategic choices available across different stages of life cycle.

Accruals quality, financial constraints, and corporate cash holdings

2019 ◽  
Vol 45 (8) ◽  
pp. 1129-1145 ◽  
Author(s):  
Hatem Mansali ◽  
Imen Derouiche ◽  
Karima Jemai
Keyword(s):  
Information Asymmetry ◽  
Financial Constraints ◽  
Earnings Quality ◽  
Cash Holdings ◽  
Reporting Quality ◽  
Discretionary Accruals ◽  
Content Type ◽  
Accruals Quality ◽  
Corporate Cash Holdings ◽  
High Information

Purpose The purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect. Design/methodology/approach The paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality. Findings The study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings. Practical implications The results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers. Originality/value This paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Family control, agency conflicts, corporate cash holdings and firm value

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ruchi Moolchandani ◽  
Sujata Kar
Keyword(s):  
Firm Value ◽  
Family Firms ◽  
Cash Holdings ◽  
Minority Shareholders ◽  
Content Type ◽  
Family Control ◽  
Indian Family ◽  
Agency Conflict ◽  
Cash Reserves ◽  
Corporate Cash Holdings

PurposeThis paper examines whether family control exerts any influence on corporate cash holdings in Indian listed firms. It also examines how this accumulated cash of family firms impacts firm value.Design/methodology/approachThe study uses dynamic panel data regression estimated using two-step system generalized method of moments (GMM) on S&P BSE 500 firms during 2009–2018 for testing the repercussions of family control on the cash levels of a firm. Further, fixed effects regression has been employed for the valuation analysis.FindingsEstimation results showed that family control negatively impacts cash holdings in Indian firms. Further, the cash accumulation by family firms adversely affects the market valuation of the firm. These findings signal a principal–principal (P-P) agency conflict in Indian family firms, i.e. friction between family owners and minority shareholders' interests. Minority shareholders fear that a part of the cash reserves will be used by family members for personal benefits. Thus, they discount cash reserves in family firms.Originality/valueThe study adds to the determinants of corporate cash holdings in emerging markets. To the best of the authors’ knowledge, this is the first study from India investigating family control as a determinant of cash policy. It sheds light on the P-P agency conflict in Indian family firms. P-P agency conflict is less researched in cash holdings literature as opposed to the principal–agent managerial disputes. Also, the study uses a more comprehensive definition of family control rather than just considering the ownership as used in prior cash holding research.

Does Shariah compliance affect corporate cash holdings and cash adjustment dynamics? Evidence from Malaysia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Moncef Guizani ◽  
Gaafar Abdalkrim
Keyword(s):  
Positive Impact ◽  
Generalized Method Of Moments ◽  
Cash Holdings ◽  
Cash Flows ◽  
Least Square ◽  
Cash Holding ◽  
External Financing ◽  
Content Type ◽  
Listed Firms ◽  
Corporate Cash Holdings

Purpose The purpose of this paper is to investigate the effect of Shariah compliance status on corporate cash holding decision. Design/methodology/approach This study applies ordinary least square and generalized method of moments regression models for a sample of 178 Malaysian listed firms over the period 2008–2017. Findings The results show that Shariah compliance has positive impact on the level of cash reserves of firms. It is also found that Shariah-compliant (SC) firms quickly adjust their level of cash holdings toward a target level than non–Shariah-compliant (NSC) firms. These results can be explained by the restrictions imposed by Shariah rules on firms to sustain their compliance status. Further, the results reveal that SC firms are likely to hold more cash out of their cash flows. This is the expected result, as the firms operating within the ambit of Shariah rulings and regulations face external financing constraints. Practical implications This study has important implications for managers, policymakers and regulators. For managers, the study is an important reference to understand and design cash management policies by considering restrictions imposed by Shariah regulations. In particular, managers should pay more attention to periods of credit crunch and weak economic conditions in which SC firms may be exposed to greater bankruptcy risks. For policymakers and regulators, this study may be useful in assessing the effect of the restrictions imposed by Shariah law on firm’s cash holding decision. Therefore, in an effort to increase the supply of external financing available to SC firms, policymakers should encourage the issuing of Islamic financial products. Originality/value This paper focuses on SC firms where financial constraints are bound to be more stringent than for NSC firms. It explores the implications of relevant Islamic principles on corporate cash holdings.

The impact of cash holdings and external financing on investment-cash flow sensitivity

2014 ◽  
Vol 13 (3) ◽  
pp. 251-273 ◽  
Author(s):  
Tae-Nyun Kim
Keyword(s):  
Cash Flow ◽  
Fixed Effects ◽  
Financial Constraints ◽  
Negative Relationship ◽  
Cash Holdings ◽  
External Financing ◽  
Content Type ◽  
Flow Sensitivity ◽  
Cash Flow Sensitivity ◽  
The Impact

Purpose – This paper aims to propose several factors which can explain the negative relationship between financial constraints and investment-cash flow sensitivity. Design/methodology/approach – The author uses traditional fixed effects model and minimum distance panel estimation by Erickson and Whited (2000) to estimate investment-cash flow sensitivity in the cash flow-augmented investment equation. In addition, principal component analysis is used to construct a financial constraints measure. Findings – First, it was found that substitutability between cash holdings and free cash flow can partially explain why financially constrained firms do not depend on cash flow as heavily as we expect. Second, it was confirmed that the level of net external financing can also partially explain the investment-cash flow sensitivity puzzle. Furthermore, it was argued that the influence of cash holdings and external financing on investment-cash flow sensitivity is caused by the low level of internal cash flow for financially constrained firms. This argument is supported by our findings from an examination of investment-cash flow sensitivity for bank-dependent firms during the recession periods. Originality/value – This paper contributes to the literature by suggesting possible partial explanations for the contradictory relationship between investment-cash flow sensitivity and financial constraints.

scholarly journals Do Firm-Bank Relationships Affect Corporate Cash Holdings?

2017 ◽  
pp. 5-20
Author(s):  
Andriy Tsapin
Keyword(s):  
Empirical Evidence ◽  
Financial Constraints ◽  
Cash Holdings ◽  
Agency Conflicts ◽  
Main Bank ◽  
Cash Reserves ◽  
The Impact ◽  
The Relationship ◽  
Corporate Cash Holdings

This paper explores the impact of firm-bank relationships on corporate cash holdings using a sample of more than 4,000 Ukrainian companies over the period from 2008 to 2015. The empirical evidence suggests that the duration of the relationship and the presence of multiple bank relationships affect corporate cash holdings. Specifically, an increase in the length of a bank’s relationship with a main bank initially reduces corporate cash holdings but the effect turns positive due to the hold-up problem when the relationship matures. We also observe that companies with a greater number of bank relationships tend to hold more cash reserves, whereas more competition among banks allows firms to hold less cash. Additionally, we document that firm-bank relationships are important in helping firms resolve agency conflicts and facilitate reducing a firm’s financial constraints.

Female directors and corporate cash holdings: monitoring vs executive roles

2019 ◽  
Vol 58 (2) ◽  
pp. 295-312 ◽  
Author(s):  
Domenico Rocco Cambrea ◽  
Paolo Tenuta ◽  
Vincenzo Vastola
Keyword(s):  
Fixed Effects ◽  
Gender Diversity ◽  
Cash Holdings ◽  
Listed Companies ◽  
Management Decision ◽  
Content Type ◽  
Female Directors ◽  
Cash Reserves ◽  
The Impact ◽  
Corporate Cash Holdings

Purpose The purpose of this paper is to investigate the impact of gender diversity on corporate cash holdings by scrutinizing different positions covered by female board directors. Design/methodology/approach The paper examines a sample of Italian listed companies between 2006 and 2015. Fixed-effects regressions are employed as the base empirical methodology. In addition, because the link between corporate governance variables and cash may suffer from endogeneity issues, the study employs several tests to control for this potential problem. Findings The empirical findings demonstrate that the relationship between gender diversity and cash holdings depends on the role of female directors on the boards. Specifically, the evidence shows that women in monitoring functions, ruled by independent directors and female chairs, led to a decrease in cash reserves. Conversely, companies managed by female CEOs have larger cash holdings. Research limitations/implications The paper refers to Italian listed companies only and does not analyze whether and how the financial crisis has affected the link between female directors and cash reserves. Practical implications The study provides insights for the diverse effects of female directors on cash management decision and contributes to the debate on gender diversity capabilities for improving firm financial flexibility. Originality/value This paper is the first empirical study to attempt to disentangle the effect of gender diversity on cash holdings. It sheds light on the consequences of appointing female directors on cash policies and explores the Italian context after the introduction of the gender quotas law.

Revisiting the concept of a competitive “cash advantage”

2015 ◽  
Vol 43 (4) ◽  
pp. 38-46 ◽  
Author(s):  
Joseph Calandro, Jr.
Keyword(s):  
Competitive Advantage ◽  
Corporate Strategy ◽  
Academic Research ◽  
Cash Holdings ◽  
Content Type ◽  
Cash Reserves ◽  
Changing Role ◽  
Viable Method ◽  
Practical Implications

Purpose – The purpose of this paper is to profile how ample cash holdings can serve as a competitive advantage by first mitigating the risk of becoming a forced seller during times of distress, and then positioning a firm to take strategic advantage of forced selling and other forms of distress-generated opportunities. Design/methodology/approach – The author reviews the changing role of cash over time in corporate strategy, and how inadequate cash has caused or contributed to corporate failures. Findings – The findings of this paper, which are supported by historical and contemporary examples, are that ample cash reserves can be a powerful source of comparative advantage. Practical implications – This article supports earlier work published in Strategy & Leadership that shows how Graham-and-Dodd-based analysis is a viable avenue of academic research and a viable method with which to assess and formulate corporate strategic initiatives such as mergers and acquisitions, share buy-backs, risk management and, in this case, the strategic uses of cash. Originality/value – This paper offers leaders and financial executives a practical explanation of how ample cash holdings can serve as a competitive advantage.

scholarly journals Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

2019 ◽  
Vol 26 (1) ◽  
pp. 76-97
Author(s):  
Ghulam Ayehsa Siddiqua ◽  
Ajid ur Rehman ◽  
Shahzad Hussain
Keyword(s):  
High Speed ◽  
Financial Constraints ◽  
Generalized Method Of Moments ◽  
Cash Holdings ◽  
Optimal Level ◽  
Dynamic Panel Data ◽  
Asymmetric Adjustment ◽  
Content Type ◽  
Listed Firms ◽  
Target Firms

Purpose The purpose of this paper is to investigate the asymmetric adjustment of cash holdings in Pakistani firms for above and below target firms. Design/methodology/approach The study employs generalized method of moments (GMM) to investigate the adjustment of cash holdings. Findings The study found that the firms which hold cash above the optimal level of cash holdings have higher speed of adjustment than the firms which hold cash below the optimal level. Financially constrained (FC) firms also adjust their cash holdings faster than financially unconstrained (FUC) firms but high speed of downward adjustment does not remain persistent after financial constraints are controlled. Findings of this study reveal this asymmetric adjustment in above and below target firms and extend these results in FC and FUC Pakistani listed firms, respectively. Research limitations/implications The conclusion of this study has been derived under certain limitations. There is a vast space to extend this study in different dimensions. Firms operating in capital-intensive industries may provide different results for financial constraints because their policy designing would be quite different from other firms. Originality/value This study contributes to cash holdings research in Pakistan by exploring the adjustment behavior of cash holdings across Pakistani non-financial firms using econometric modeling. Downward adjustment rate is supposed to be higher than upward adjustment rate and this rate is tested using dynamic panel data model. Similarly, it is inferred that this relationship holds for above target firms even after including the financial constraints in the presented model.

scholarly journals Family Control And The Value Of Cash Holdings

2015 ◽  
Vol 31 (2) ◽  
pp. 647 ◽  
Author(s):  
Sabri Boubaker ◽  
Imen Derouiche ◽  
Majdi Hassen
Keyword(s):  
Firm Value ◽  
Family Firms ◽  
Cash Holdings ◽  
Firm Resources ◽  
Family Control ◽  
Large Sample ◽  
Listed Firms ◽  
Excess Cash ◽  
Cash Reserves ◽  
Corporate Cash Holdings

The present study investigates the effects of family control on the value of corporate cash holdings. Using a large sample of French listed firms, the results show that the value of excess cash reserves is lower in family firms than in other firms, reflecting investors concern about the potential misuse of cash by controlling families. We also find that the value of excess cash is lower when controlling families are involved in management and when they maintain a grip on control, indicating that investors do not expect the efficient use of cash in these firms. Our findings are consistent with the argument that the extent to which excess cash contributes to firm value is lower when dominant shareholders are likely to expropriate firm resources. Overall, family control seems to be a key determinant of cash valuation when ownership is concentrated.

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