Cash Holdings and Corporate Governance

This chapter investigates the empirical factors affecting corporate cash holdings with special emphasis on corporate governance variables for a sample of Turkish-listed nonfinancial firms over the period 2006 to 2010. The findings reveal a significant non-linear relation between family ownership and cash holdings. In addition, while board structure does not significantly affect the level of cash holdings, tunneling increases cash reserves of firms. Furthermore, the results indicate that cash flow, leverage, other liquid assets that can be used as cash substitutes, the degree of tangibility of assets, and firm size are important in determining cash holdings among Turkish companies.

Attention to dividends, inattention to earnings?

We examine whether dividends serve as substitutes or complements to accounting information in firm valuation. Consistent with dividends substituting for earnings information, we find that dividend paying firms have 11%–15% lower earnings response coefficients (ERCs) than non-payers. We find more substitution when the dividend provides a stronger signal of permanent earnings: when the firm is less likely to cut the dividend, when the firm is likely to fund the dividend out of earnings rather than cash reserves, or when the dividend is larger. We then show that dividend payers have lower absolute returns, less trading volume, and fewer analyst forecasts at the earnings announcement (EA), suggesting that dividend payers attract less attention to their less informative EAs. Finally, we show that the lower EA attention translates into less earnings management and fewer earnings-related disclosures for dividend payers relative to non-payers. Collectively, this evidence suggests that dividends supply information about permanent earnings and, although costly, could be an efficient way for some firms to satisfy investors’ demand for earnings information.

Uncertainty and Investment Choice in a Real-Options Model of the Firm

<p>A firm must consider many factors when adopting an investment policy including, but not limited to the size, scope, and cost of each investment, as well as the firm's financial condition. The multitude of considerations makes optimal decision-making much more complex than is indicated by standard real-option models of investment. This thesis investigates the behaviour of a cash-constrained firm that has access to two distinct investment opportunities. Such a firm must not only choose the timing of each investment, but often it must also choose between investments. When compared with similar one-project models of the past, the introduction of an additional investment opportunity alters the general results in a variety of ways. If one of the projects has a high yield, and therefore a quick payback period, this project can provide benefits over and above its NPV as the cash it generates relaxes future capital constraints for follow-up investment. When the firm is sufficiently constrained, this can lead to an investment policy where high-yield low-NPV projects are implemented instead of lower-yield higher-NPV projects, a direct deviation from the NPV rule. If one of the projects can raise a relatively large proportion of its value as collateral for investment, then the constrained firm will at times accelerate investment in this project in order to free up cash reserves for the other opportunity. In single-project models, when the firm is able to invest in a low NPV project, the value of additional cash is low. This is because the project will be delayed regardless of the level of cash. However, when the firm has a second investment opportunity, if one project has a low NPV and the other a high NPV then additional cash is beneficial to the firm. The two-project model also provides insights into how resources should be allocated if the constrained firm decides to split and operate the projects as separate firms. When cash is low, more resources should go to the spin-off with the high NPV project in order to give it the best chance of being initiated. However, when cash is high, disproportionately more resources should go to the spin-off with the lower NPV project as investment in the higher NPV project is likely to occur without the help of additional resources.</p>

Uncertainty and Investment Choice in a Real-Options Model of the Firm

<p>A firm must consider many factors when adopting an investment policy including, but not limited to the size, scope, and cost of each investment, as well as the firm's financial condition. The multitude of considerations makes optimal decision-making much more complex than is indicated by standard real-option models of investment. This thesis investigates the behaviour of a cash-constrained firm that has access to two distinct investment opportunities. Such a firm must not only choose the timing of each investment, but often it must also choose between investments. When compared with similar one-project models of the past, the introduction of an additional investment opportunity alters the general results in a variety of ways. If one of the projects has a high yield, and therefore a quick payback period, this project can provide benefits over and above its NPV as the cash it generates relaxes future capital constraints for follow-up investment. When the firm is sufficiently constrained, this can lead to an investment policy where high-yield low-NPV projects are implemented instead of lower-yield higher-NPV projects, a direct deviation from the NPV rule. If one of the projects can raise a relatively large proportion of its value as collateral for investment, then the constrained firm will at times accelerate investment in this project in order to free up cash reserves for the other opportunity. In single-project models, when the firm is able to invest in a low NPV project, the value of additional cash is low. This is because the project will be delayed regardless of the level of cash. However, when the firm has a second investment opportunity, if one project has a low NPV and the other a high NPV then additional cash is beneficial to the firm. The two-project model also provides insights into how resources should be allocated if the constrained firm decides to split and operate the projects as separate firms. When cash is low, more resources should go to the spin-off with the high NPV project in order to give it the best chance of being initiated. However, when cash is high, disproportionately more resources should go to the spin-off with the lower NPV project as investment in the higher NPV project is likely to occur without the help of additional resources.</p>

Characteristics and Shareholder Wealth Effects of Mergers and Acquisitions Involving European Renewable Energy Companies

The present study documents a positive market reaction to mergers and acquisition (M&A) deals involving renewable energy companies. Acquirers record positive post-deal cumulative risk-adjusted returns upon taking over a renewable energy target, especially if the former also operates in the renewable energy sector. Such deals often involve purchases of majority equity stakes financed with acquirers’ stock rather than cash. Acquirers of renewable energy firms tend to be more profitable and cash-rich than their industry peers, yet they are less likely to be serial acquirers and channel cash reserves towards M&As. We evidence that the quality of corporate governance in the energy sector may play a substantial role in shaping the choice of targets; a director’s outside affiliations increase the likelihood of takeovers of non-energy firms, while the presence of outsiders on board appears to incentivize diversification into renewable energy. While acquisitions of renewable energy firms feature lower-than-average acquisition premia and generate positive short-term stock returns, they are found to exercise an overall negative short- and medium-term impact on the combined entities’ operating performance. Overall, capital markets appear to attach a sizeable premium to risky deals involving renewable energy firms, possibly in expectation of wealth accrual in the long term.

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

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.

Does economic risk affect corporate cash holdings?

PurposeEconomic risk plays a vital role in firm's cash holdings. We aim to determine the impact of economic risk on the firm's cash holdings.Design/methodology/approachThe data is collected from the DataStream from 2002 to 2018, which covers 552 listed firms in the manufacturing sector of Pakistan, Sri Lanka, India and Bangladesh. We apply a two-step dynamic panel estimation to analyze the results.FindingsWe use the variance of inflation and variance of interest rate as proxies of economic risk. Our results show that variance of inflation has a significant and negative effect while the variance of interest rate has a significant and positive effect on firms' cash holdings in selected countries. Furthermore, we find economic risk negatively affects the firm's cash holdings in the country-wise analysis. Firms should maintain a reasonable amount of cash reserves to handle uncertain situations.Originality/valueThis study may provide insights to financial decision-makers of a firm for better cash management according the economic conditions of the country.

CORPORATE INVESTMENT IN THE GLOBAL FINANCIAL CRISIS

This paper exams the impact of high levels of bank debt, leverage, credit obtained from government banks and cash reserves in the long and short terms investments of firms in the main Latin American countries after this crisis. For this purpose, it is applied a difference-in-differences test in a sample of more than 500 public and private firms, using hand-collected data of firms’ governmental bank dependence. The review period considers five previous (2003–2007) and subsequent years (2008–2012) to the crisis. The major results are reduction of long-term investments for firms with greater banking dependence, as well as short-term investments for firms with a higher level of cash reserves. Besides, firms that are more reliant on government-owned banks reduce capital expenditures. Differently from other studies, this one examines the impact of the last global financial crisis on the firms´ investment, considering its dependence of bank debt of institutions that belongs to the government or not. Understanding the mechanisms available to emerging economies can shed light on new countercyclical policies of governments and changes in the legislations of the financial system.

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

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.