Asymmetric Modelling of the Adjustment Speed of Cash Holdings

Chang, Yanhao; Benson, Karen L.; Faff, Robert W.

doi:10.2139/ssrn.2914986

Cited by 4 publications

(6 citation statements)

References 18 publications

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“…In case of adjustment speed of cash holdings, different researchers hold different opinions. Chang et al (2017) argued that firms have different adjustment costs so they follow different paths to reach their optimal level of cash. Furthermore, they hold that there is always an optimal level of cash and when the cash level deviates from the upper or lower cash regime then systematic adjustment of cash occurs.…”

Section: Literature Reviewmentioning

confidence: 99%

Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

Siddiqua

Rehman

Hussain

2019

JABES

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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.

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Section: Literature Reviewmentioning

confidence: 99%

Asymmetric targeting of corporate cash holdings and financial constraints in Pakistani firms

Siddiqua

Rehman

Hussain

2019

JABES

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“…By using a large data panel of Spanish firms for the period 1996-2010, the authors show that constrained firms are inclined to reserve more cash out of generated cash flow than the unconstrained ones. The academic literature reveals that more financially constrained firms have the tendency to hold more cash compared with less financially constrained firms, regardless the criteria used to define constrained and unconstrained firms (Almeida, Campello, & Weisbach, 2004;Arslan, Florackis, & Ozkan, 2006;Song & Lee, 2012;López-Gracia & Sogorb-Mira, 2015;Chang et al, 2017). The characteristics of emerging economies represent a good environment to consider financial constraints while evaluating the relationship cash-firm value.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The majority of academic literature shows that cash holdings are more valuable to constrained firms. In other words, less financially constrained firms tend to hold less cash compared with more constrained ones (Almeida et al, 2004;Arslan et al, 2006;Song & Lee, 2012;López-Gracia & Sogorb-Mira, 2015;Chang et al, 2017).…”

Section: The Nonlinear Relationship Between Corporate Cash Holdings Amentioning

confidence: 99%

“…Moreover, the cash holdings offer a buffer against financial distress costs when the firm faces frictions in generating operating cash flows, both in volume and timely. On the other hand, the increase in cash holdings implies several costs: a liquidity premium, tax disadvantages, and agency costs for shareholders (Chang, Benson, & Faff, 2017). The trade-off theory streamlined in the literature governs the firms which need to balance costs and benefits of holding cash to determine the optimal level.…”

Section: Introductionmentioning

confidence: 99%

“…In a financial market that can face restrictions and a high dependence on international flows, cash becomes more valuable. Chang et al (2017) argue that the amount of cash holdings is more relevant to constrained firms. Polish firms hold a higher level of cash, as it represents around 10% of the total assets compared to other developing markets, i.e.…”

Section: Introductionmentioning

confidence: 99%

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Firm Value and Corporate Cash Holdings. Empirical Evidence from the Polish Listed Firms

Anton¹,

Nucu²

2019

E+M

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In the context of imperfect markets, it is important to understand the relationship between nonearning assets and firm value, in order to evaluate the corporate financial policies and to attain the right equilibrium between liquidity and profitability. The aim of our paper is to assess the relationship between corporate cash holdings and firm value for a sample of 719 Polish listed firms over the period 2007-2016. The study reports an inverted U-shape relationship between cash holdings and firm value, irrespective of whether we use static regression methods or dynamic panel regression. Our results confirm the existence of an optimum level of cash holdings at 27.06% of total assets. Furthermore, the nonlinear relationship between firm value and corporate cash holdings is found for all Polish listed firms, financially and less financially constrained. We report two breakpoints of the cash-value relationship, in the context of financial constraints, and the results indicate that the optimum level of cash holdings is much higher for financially constrained firms than less financially constrained ones. Finally, we show that the financial crisis has no additional impact on the nonlinear relationship between cash holdings and firm value. We validate the financial constraints as having a more pronounced effect on the relationship between corporate cash holdings and firm value, compared to the financial crisis, as intervening effects, in the context of the Polish economy. This study holds important microeconomics policy implications-firm-level financial policies should evaluate the tradeoff between cash holdings and market value in order to maintain the firm financial performance.

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