Are excess cash holdings more valuable to firms in times of crisis? Financial constraints and governance matters

Abstract

This study examines the impact of cash holdings on firm value before and during the 2008 financial crisis, conditional on financial constraints and corporate governance. We show that the equity market places a higher value on corporate cash holdings during the financial crisis and cash holdings are more valuable to constrained firms, compared to unconstrained firms. However, the triple-interaction of cash with constraints and crisis shows the crisis value effect for constrained firms is weaker than for unconstrained firms. Further, the triple-interaction of excess cash with governance and constraints shows that a positive governance effect on corporate cash holdings is more pronounced for firms that are financially constrained.

The Firm Value and Marketing Intensity Decision in Conditions of Financial Constraint: A Comparative Study of the United States and Latin America

“…First, despite the controversy regarding financial constraint measurement (Kaplan and Zingales 1997), the literature recognizes its generalized use (Chen and Chen 2012; Hall et al 2016; Ughetto 2016). Second, there is empirical evidence that the effects of financial constraints are observed in cash flow (Campello, Graham, and Harvey 2010; Chang, Benson, and Faff 2017). Third, the use of cash flow is theoretically justified according to the free cash flow argument proposed by Jensen (1978), which predicts that in firms where there is a separation between management and ownership, a company can freely access cash flow (Ughetto 2016).…”

“…As there are few studies on the relationship between financial constraint and marketing, another way to relate them is through the concept of economic cycles. Macroeconomic variations and crises induce firm’s financial constraints (Campello, Graham, and Harvey 2010; Chang, Benson, and Faff 2017). Financial constraints can affect the reduction of marketing intensity.…”

“…To answer these questions, we review the effect of financial constraints in an international setting. The financial literature presents empirical evidence that macroeconomic variations and crises drive within-firm financial constraints (Campello, Graham, and Harvey 2010; Chang, Benson, and Faff 2017). Moreover, macroeconomic volatility—that is, a sharp contraction in gross domestic product (GDP) and the country’s relatively quick recovery from the collapse—is frequent in the Latin American (LA) economic environment.…”

Mining Risk-Related Sentiment in Corporate Annual Reports and Its Effect on Financial Performance

“…Financially weak companies tend to hold more cash than those with a strong capital position (López-Gracia & Sogorb-Mira, 2015;Chang et al, 2017). Therefore, some companies seek to maintain higher liquidity as an important asset for financing investments without increasing external resources (Anton & Nucu, 2019), thus creating a stable impression for stakeholders (Tong, 2014) -this is reflected in the formulation of corporate financial policies (Maheshwari & Rao, 2017).…”

Cash holdings, costly financing and theqtheory of returns

“…Chang et al . () show that governance and crisis periods have interactive effects, with crisis periods further increasing the positive effect of governance on the value of cash holdings. Edward and Ronan () argue that agency problems explain patterns in persistent excess cash in Australia—as firms with persistent excess cash have low cash values—while Chan et al .…”