Corporate cash holdings: financial determinants and consequences

Nicolas Couderc

Description

Niveau: Supérieur, Doctorat, Bac+8
Corporate cash holdings: financial determinants and consequences? Nicolas Couderc Comments welcome. Abstract This paper investigates the determinants and consequences of the cor- porate cash holdings. We use firm-level data of 4,515 firms in Canada, France, Germany, Great-Britain and the USA over the period 1989-2002. We show that cash holdings must be analyzed from a dynamic point of view: we find strong empirical support for the hypothesis of implicit cash targets. Financial determinants influence the corporate cash holdings, but it's not clear which model – the transaction cost model or the manager- ial opportunism thesis – supports best our empirical findings. In order to settle the question, we focus on the consequences of “excessive” cash hold- ings. To do so, we implement a bivariate probit model to take into account the fact that cash balances levels and the future performance of these firms are probably jointly determined. We conclude that excessive cash hold- ings lead to poor firm performances. This result is clearly in favor of the managerial opportunism thesis rather than the transaction cost thesis for enlightening cash holdings motivation. Keywords: Corporate cash holdings, corporate governance, dynamic panel data, bivariate probit model. JEL Classification: C33, G32. ?Financial support from the Alliance Program is acknowledged. Bureau Van Dijk (Paris) pro- vided us the Osiris database.

• financial determinants


• block shareholders


• thesis


• holdings


• monitoring costs


• another theoretical body


• external funds


• finance investments


• costs vary


• can potentially

Sujets

• Chevallier
• Canadá
• Bertrand
• Couderc
• Thesis

Informations

• Publié par: profil-zyak-2012
• Nombre de lectures: 68
• Langue: English

Extrait

Corporatecashholdings:financialdeterminants andconsequences ∗ NicolasCouderc § Commentswelcome. Abstract Thispaperinvestigatesthedeterminantsandconsequencesofthecor- poratecashholdings.Weusefirm-leveldataof4,515firmsinCanada, France,Germany,Great-BritainandtheUSAovertheperiod1989-2002. Weshowthatcashholdingsmustbeanalyzedfromadynamicpointof view:wefindstrongempiricalsupportforthehypothesisofimplicitcash targets.Financialdeterminantsinfluencethecorporatecashholdings,but it’snotclearwhichmodel–thetransactioncostmodelorthemanager- ialopportunismthesis–supportsbestourempiricalfindings.Inorderto settlethequestion,wefocusontheconsequencesof“excessive”cashhold- ings.Todoso,weimplementabivariateprobitmodeltotakeintoaccount thefactthatcashbalanceslevelsandthefutureperformanceofthesefirms areprobablyjointlydetermined.Weconcludethatexcessivecashhold- ingsleadtopoorfirmperformances.Thisresultisclearlyinfavorofthe managerialopportunismthesisratherthanthetransactioncostthesisfor enlighteningcashholdingsmotivation. Keywords:Corporatecashholdings,corporategovernance,dynamic paneldata,bivariateprobitmodel. JELClassification:C33,G32. ∗ FinancialsupportfromtheAllianceProgramisacknowledged.BureauVanDijk(Paris)pro- videdustheOsirisdatabase.TheauthorwouldliketothankOlivierBertrand,GuntherCapelle- Blancard,ThérèseChevallierandSéverineVandelanoite,aswellastheseminarparticipantsat the2005EFMACorporateGovernanceSymposiumfortheirvaluablecommentsandfeedback. Remainingerrorsaremine. § TEAM-CNRS.UniversityofParis1Panthéon-Sorbonne,106-112boulevarddel’Hôpital,F- 75647ParisCedex13,France.Mail:[e-mail] 1

“Andwhataboutthecash,myexistencejewel?” Ch.Dickens,NicholasNickelby,ch.17 Introduction It’sawell-knownfactthatnearlyallfirmsholdcashreserves,whichareoften large:inourpanel,themedianUSfirmholdsmorethan13%ofitstotalassets ascashandmarketablesecurities 1 overthe1989-2002period. Ifcapitalmarketswereperfect,afirmwouldnothaveincentivesorneedsto holdsubstantialcashreserves:whenfirmsdecidetoinvest,orfaceacashshort- age,theycanfindtheneededfundsonthemarketatacostwhichisfunctionof theanticipatedriskandprofitabilityoftheirprojects 2 .Thegapbetweenthere- alityandthepredictionofthemodelwithperfectmarketsiswide.SinceOpler etal.(1999),thedeterminantsofcorporatecashholdingshavebeenregularly studied,inordertotrytofillthisgap.Undertheimperfectionofcapitalmar- ketshypothesis 3 ,internalandexternalfundsarenolongerperfectsubstitutes andmanytheoreticalfactors,firm-specific(financial)aswellasinstitutional, havebeenputforwardtoenlightenthemotivesforcorporatecashholdings. Ontheonehand,afirmwithcashholdingswillnothavetoforegosome positivenetpresentvalueprojectsbecauseofmarketimperfections,asymmet- ricinformationortransactioncosts.Thisfirmisalsolesslikelytofacefinancial distress.Ontheotherhand,fromacorporategovernancepointofview,large cashholdingscanbesuspectedofweakeningmarketdisciplineandcanin- creasetheentrenchedCEOautonomy.Themanagercanpotentiallyusethese cashholdingstofinanceinvestmentswhichwillnotenhancefirmvalue.The questionisabouttherelativepartofcashholdingswhichcanbeexplainedby precautionaryoroptimalfinancialplanningmotivesandbymanagerialoppor- tunism.Theexistingempiricalevidenceisquitemixedonthisquestion. Inthispaper,westudythecashholdingsdeterminants,usingOsiris 4 and Datastreamdatafor4,515firmsoffivecountries(Canada,France,Germany, Great-BritainandUSA).Weimplementadynamicpaneldataestimation,to checkwhetherfirmsactasiftheyhadanimplicittargetfortheircashholdings ornot.WithaGMM-derivedmethod,wecanfocusonthedynamicnatureof cashholdingdecisions,allowingfordelaysorimperfectionsintheadjustment ofcashholdings.Thedynamicnatureofcashholdingsisstronglyconfirmed, butitishardtodecidewhichoneofthetwoalternativetheoreticalmodels 1 7%inCanada,16%inGermany,18%inFranceand14%inGreat-Britain. 2 Aslongasthefirmisnotinfinancialdistress. 3 Atleastunderstoodasalimitedcapacityofthemarkettofinancefirmsandprojectsandto discriminatebetweenthem. 4 OsirisisaBureauVanDijk’spublication.Osirisprovidesstandardizedandasreportedfinan- cialaccountsfortheworld’spubliclyquotedcompanies(morethan24,000),upto15yearson approximately. 2