Corporate cash holdings: financial determinants and consequences

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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.

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  • thesis

  • holdings

  • monitoring costs

  • another theoretical body

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Corporatecashholdings:financialdeterminantsandconsequencesNicolasCouderc§Commentswelcome.AbstractThispaperinvestigatesthedeterminantsandconsequencesofthecor-poratecashholdings.Weusefirm-leveldataof4,515firmsinCanada,France,Germany,Great-BritainandtheUSAovertheperiod1989-2002.Weshowthatcashholdingsmustbeanalyzedfromadynamicpointofview:wefindstrongempiricalsupportforthehypothesisofimplicitcashtargets.Financialdeterminantsinfluencethecorporatecashholdings,butit’snotclearwhichmodel–thetransactioncostmodelorthemanager-ialopportunismthesis–supportsbestourempiricalfindings.Inordertosettlethequestion,wefocusontheconsequencesof“excessive”cashhold-ings.Todoso,weimplementabivariateprobitmodeltotakeintoaccountthefactthatcashbalanceslevelsandthefutureperformanceofthesefirmsareprobablyjointlydetermined.Weconcludethatexcessivecashhold-ingsleadtopoorfirmperformances.Thisresultisclearlyinfavorofthemanagerialopportunismthesisratherthanthetransactioncostthesisforenlighteningcashholdingsmotivation.Keywords:Corporatecashholdings,corporategovernance,dynamicpaneldata,bivariateprobitmodel.JELClassification:C33,G32.FinancialsupportfromtheAllianceProgramisacknowledged.BureauVanDijk(Paris)pro-videdustheOsirisdatabase.TheauthorwouldliketothankOlivierBertrand,GuntherCapelle-Blancard,ThérèseChevallierandSéverineVandelanoite,aswellastheseminarparticipantsatthe2005EFMACorporateGovernanceSymposiumfortheirvaluablecommentsandfeedback.Remainingerrorsaremine.§TEAM-CNRS.UniversityofParis1Panthéon-Sorbonne,106-112boulevarddel’Hôpital,F-75647ParisCedex13,France.Mail:couderc@univ-paris1.fr1
“Andwhataboutthecash,myexistencejewel?”Ch.Dickens,NicholasNickelby,ch.17IntroductionIt’sawell-knownfactthatnearlyallfirmsholdcashreserves,whichareoftenlarge:inourpanel,themedianUSfirmholdsmorethan13%ofitstotalassetsascashandmarketablesecurities1overthe1989-2002period.Ifcapitalmarketswereperfect,afirmwouldnothaveincentivesorneedstoholdsubstantialcashreserves:whenfirmsdecidetoinvest,orfaceacashshort-age,theycanfindtheneededfundsonthemarketatacostwhichisfunctionoftheanticipatedriskandprofitabilityoftheirprojects2.Thegapbetweenthere-alityandthepredictionofthemodelwithperfectmarketsiswide.SinceOpleretal.(1999),thedeterminantsofcorporatecashholdingshavebeenregularlystudied,inordertotrytofillthisgap.Undertheimperfectionofcapitalmar-ketshypothesis3,internalandexternalfundsarenolongerperfectsubstitutesandmanytheoreticalfactors,firm-specific(financial)aswellasinstitutional,havebeenputforwardtoenlightenthemotivesforcorporatecashholdings.Ontheonehand,afirmwithcashholdingswillnothavetoforegosomepositivenetpresentvalueprojectsbecauseofmarketimperfections,asymmet-ricinformationortransactioncosts.Thisfirmisalsolesslikelytofacefinancialdistress.Ontheotherhand,fromacorporategovernancepointofview,largecashholdingscanbesuspectedofweakeningmarketdisciplineandcanin-creasetheentrenchedCEOautonomy.Themanagercanpotentiallyusethesecashholdingstofinanceinvestmentswhichwillnotenhancefirmvalue.Thequestionisabouttherelativepartofcashholdingswhichcanbeexplainedbyprecautionaryoroptimalfinancialplanningmotivesandbymanagerialoppor-tunism.Theexistingempiricalevidenceisquitemixedonthisquestion.Inthispaper,westudythecashholdingsdeterminants,usingOsiris4andDatastreamdatafor4,515firmsoffivecountries(Canada,France,Germany,Great-BritainandUSA).Weimplementadynamicpaneldataestimation,tocheckwhetherfirmsactasiftheyhadanimplicittargetfortheircashholdingsornot.WithaGMM-derivedmethod,wecanfocusonthedynamicnatureofcashholdingdecisions,allowingfordelaysorimperfectionsintheadjustmentofcashholdings.Thedynamicnatureofcashholdingsisstronglyconfirmed,butitishardtodecidewhichoneofthetwoalternativetheoreticalmodels17%inCanada,16%inGermany,18%inFranceand14%inGreat-Britain.2Aslongasthefirmisnotinfinancialdistress.3Atleastunderstoodasalimitedcapacityofthemarkettofinancefirmsandprojectsandtodiscriminatebetweenthem.4OsirisisaBureauVanDijk’spublication.Osirisprovidesstandardizedandasreportedfinan-cialaccountsfortheworld’spubliclyquotedcompanies(morethan24,000),upto15yearsonapproximately.2