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.

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.

Accruals quality and corporate cash holdings

2009 ◽  
Vol 49 (1) ◽  
pp. 95-115 ◽  
Author(s):  
Pedro J. García-Teruel ◽  
Pedro Martínez-Solano ◽  
Juan Pedro Sánchez-Ballesta
Keyword(s):  
Cash Holdings ◽  
Accruals Quality ◽  
Corporate Cash Holdings

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.

Information Asymmetry and Corporate Cash Holdings

2011 ◽  
Author(s):  
Kee H. Chung ◽  
Jang-Chul Kim ◽  
Young Sang Kim ◽  
Hao Zhang
Keyword(s):  
Information Asymmetry ◽  
Cash Holdings ◽  
Corporate Cash Holdings

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.

How does Buddhism affect corporate cash holdings?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yaoqin Li ◽  
Xichan Chen ◽  
Wanli Li ◽  
Xixiong Xu
Keyword(s):  
Corporate Governance ◽  
Cash Holdings ◽  
Institutional Ownership ◽  
Religious Culture ◽  
Legal Institutions ◽  
Governance System ◽  
Heckman Selection Model ◽  
Content Type ◽  
The Impact ◽  
Corporate Cash Holdings

PurposeThis study explores whether and how Buddhism impacts corporate cash holdings. Buddhist culture affects investors' perception of how cash is deployed and then influences corporate cash holdings. This study first examines the impact of Buddhism on corporate cash holdings and then investigates whether formal governance mechanisms such as legal institutions and institutional ownership influence the relationship between Buddhism and corporate cash holdings.Design/methodology/approachThe authors conduct empirical tests with data on Chinese listed companies between 2006 and 2019. Buddhism is measured with the natural logarithm of the number of Buddhist temples within a radius of a certain distance around a firm's headquarters. The authors adopt the OLS method to regress and take the 2SLS method, Heckman selection model and FEVD approach to address the endogeneity issue.FindingsThe results show a positive relationship between Buddhism and corporate cash holdings. This positive relation is more prominent for firms located in regions with weak legal institutions and for firms with low institutional ownership. Further analysis shows that Buddhism works through the channel of alleviating agency problems and finally improves the value of cash to investors.Research limitations/implicationsThe authors’ findings have important implications. First, this study provides inspiration for incorporating the ethical values of traditional cultures, such as Buddhism, into the corporate governance system. Second, the findings imply that informal institutions can influence corporate financial decisions beyond the effect of formal institutions, suggesting that informal systems should be emphasized when dealing with business affairs in countries where legal institutions are relatively weak. Third, the results suggest the significance of encouraging research on religious culture to explore its active role in corporate governance.Originality/valueThis study illustrates the positive value of religious culture in advancing corporate governance by relating Buddhism to corporate cash holdings based on the explanation of investors' perception. It makes a marginal contribution to the literature that investigates the determinants of cash policies and explores the firm-level consequences of religious culture, adding to the research area of culture and corporate finance.

The impact of institutional factors on corporate mechanism of cash adjustment – New evidence from emerging Asia

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Santanu Das ◽  
Ashish Kumar ◽  
Asit Bhattacharyya
Keyword(s):  
Financial Development ◽  
Cash Holdings ◽  
Content Type ◽  
Adjustment Mechanism ◽  
Management Policies ◽  
New Evidence ◽  
Corporate Cash Holdings ◽  
Adjustment Dynamics ◽  
Country Specific

PurposeThe purpose of this study is to understand how the business environment of a country has an impact on cash management policies of the firms and also to investigate if there is any asymmetry in cash adjustment dynamics when a firm deviates from its long-term target of cash holdings.Design/methodology/approachUsing a sample of seven emerging Asian countries in the period 2001–2019, the authors investigate the role of country specific variables in the corporate cash holdings and their cash adjustment mechanism. They use the panel data regression method to estimate the results.FindingsThe authors find that the overall financial development of a country has a significant impact on corporate cash holdings and cash adjustment dynamics. When a firm has excess cash, the speed of adjustment towards the target is faster as compared to when it has deficit cash holdings. Further, when a firm holds excess cash, it adjusts towards the target using cash from investments; in case of deficit cash holdings, the adjustment happens via cash from financing activities.Practical implicationsThe results of the study are helpful to corporate managers as these are important references to them to understand and design cash management policies by considering factors that are measured at the country level. It also provides them a clearer understanding about the role of corporate board and information asymmetry in cash holdings.Originality/valueThis is the first study which examines the role of country-specific variables on corporate cash holdings and their adjustment mechanism of firms in emerging Asia. Further, the study extends the literature by providing new evidence that there is asymmetry in cash adjustment dynamics of firms after controlling for the overall financial development of a country.

Gender diversity in employees and discretionary accruals: the Korean evidence

2018 ◽  
Vol 26 (3) ◽  
pp. 362-383 ◽  
Author(s):  
Hyun Ah Kim ◽  
Seok Woo Jeong
Keyword(s):  
Information Quality ◽  
Earnings Quality ◽  
Gender Diversity ◽  
Accounting Information ◽  
Discretionary Accruals ◽  
Full Time ◽  
Female Executives ◽  
Content Type ◽  
Female Workers ◽  
Part Time

Purpose This paper aims to investigate the relation between gender diversity in employees and earnings quality. Specifically, how gender diversity among full-time and part-time employees is associated with discretionary accruals in Korea is examined. Design/methodology/approach The author analyzes the association between women ratio among full-time (part-time) employees and discretionary accruals by using 3,687 firm-years of Korean listed companies from 2010 to 2012. The regression model used in Barua et al. (2010) is adopted. The dependent variables, the absolute value of discretionary accruals, are proxied by the Modified Jones Model of Dechow et al. (1995) and the Performance Matched Model of Kothari et al. (2005). Findings First, a higher ratio of women among full-time workers is related to lower discretionary accruals, whereas that of part-time female employees is not related to discretionary accruals. Second, the effect of gender diversity in employees varies depending on the possibility of earnings management. Third, the results are robust with sample firm-years without female executives, thereby suggesting that the results are not driven by the existence of female executives, and robust to accounting standards and firm-year clustering. Originality/value This paper expands the understanding about the determination of discretionary accruals by demonstrating the impact of full-time female employees on earnings quality. Previous studies demonstrated that female workers are more ethical in the workplace, and the quality of accounting information disclosed by firms with female CFOs or directors, i.e. high ranking officers, is higher. It is observed that accounting information quality is higher when firms simply have more female workers, regardless of their relative position in the firm. This complements the results of previous studies and indicates gender diversity among employees is a sign of accounting information quality.

Relationship between earnings management, CEO compensation, and stock return on Tehran Stock Exchange

2019 ◽  
Vol 23 (1) ◽  
pp. 1-22
Author(s):  
Mahdi Moardi ◽  
Mahdi Salehi ◽  
Simin Poursasan ◽  
Homa Molavi
Keyword(s):  
Earnings Management ◽  
Cash Flow ◽  
Significant Relationship ◽  
Stock Return ◽  
Stock Exchange ◽  
Discretionary Accruals ◽  
Content Type ◽  
Future Cash Flow ◽  
Accruals Quality ◽  
The Relationship

Purpose The purpose of this paper is to investigate the relationship between earnings management and chief executive officers’ (CEOs) compensation. Owing to the fact that earnings management does not have only opportunistic effects, but signaling effects, this study focuses on accruals quality to examine earnings management incentives. Thus, accruals quality is described against future cash flow. The empirical evidences suggest that a positive relationship between discretionary accruals and future cash flow provides predictive elements for earnings management, whereas a negative relationship between discretionary accruals and future cash implies to opportunistic elements for earnings management. Should there is no significant relationship between discretionary accruals and future cash flow, there will be no earnings management, and such a result suggests that incentives and managers’ performance in these firms differ. Design/methodology/approach The statistical population of this research consists of all listed companies on the Tehran Stock Exchange during 2009–2016. Panel data method is applied in order to estimate the research model. Findings Findings of the study show that there is no significant relationship between discretionary accruals and future cash flow in pharmaceutical and food industries, thus they have neither predictive nor opportunist earnings management, while the results evidence a negative significant relationship between discretionary accruals and future cash flow in machineries, automobile, mineral and chemical industries. Furthermore, it can be alleged that there is no significant difference between CEOs’ compensation in firms with opportunistic earnings management (OEM) and other types of earnings management. It shows that firms do not have appropriate plans for CEOs’ compensation. Moreover, the relationship between earnings management and stock return has been investigated in this study. We document that stock return is influenced by accruals quality and its components. In other words, stock return significantly differs in firms with OEM and firms without any kind of earnings management. Research limitations/implications The authors’ findings provide contributions; for managers, it is noticeable that stock markets have sufficient comprehension about financial statements and the undertaken procedures on them, resulting in a higher return base on fair information. For investors and regulators, using the findings, may have deeper understanding to distinguish between industries that are recognized as opportunistic and non-opportunistic, which, in turn, results in better decision and regulation. Originality/value Previous studies have been mostly investigated OEM, while the current study examines both signaling and opportunistic aspects of earnings management.

Sign in / Sign up

Export Citation Format

Share Document