Corporate liquidity and dividend policy under uncertainty

Abstract

We examine optimal liquidity (retained earnings) and dividend choice incorporating debt financing with risk of default and bankruptcy costs as well as growth options under revenue uncertainty. We revisit the conditions for dividend policy irrelevancy and the broader role of retained earnings and dividends.Retained earnings have a net positive impact on firm value in the presence of growth options, high external financing costs and low default risk. High levels of retained earnings enhance debt capacity but have a negative effect on equity value due to the likelihood of losing accumulated cash balances in case of default, unless offset by high external financing costs. Opposite directional effects of retained earnings on equity and debt create a U-shaped relation with firm value. The framework is extended to analyze management-shareholder conflicts, demonstrating that managers accumulate higher than optimal cash. JEL classification: G31, G13

What Do We Know About Corporate Cash Holdings? A Systematic Analysis

“…Cash holdings have also been analyzed as an antecedent factor that influences other corporate financial decisions and strategies such as investment levels (Arslan, Florackis, & Ozkan, ; Bakke & Gu, ; Bao, Chan, & Zhang, ; Song & Lee, ), corporate social responsibility (Arouri & Pijourlet, ; Cheung, ), supplier relationships (Bae & Wang, ; Itzkowitz, ), acquisitions (Almeida, Campello, & Hackbarth, ; Harford, ; Lie & Liu, ; Pinkowitz et al, ), share repurchases (Haw, Ho, Hu, & Zhang, ; Lee & Suh, ; Rapp et al, ), and payout policy (Koussis, Martzoukos, & Trigeorgis, ; Opler et al, ).…”

“…Last but not least, we observe new opportunities for future studies from papers that develop theoretical insights and propositions to test empirically. In Koussis et al (), testable implications and predictions from a real option framework that integrates cash holdings, dividends, investment, and financing policies are available for empirical work. In Cabello (), a new methodology named Markov chains by blocks is presented to indicate the conditions and knowledge that ensure optimal cash in bank branching cash holdings.…”

Greek Sovereign Debt: Addressing Economic Distress and Growth in the Euro Area

“…An idle work force can be a wasting asset or can be turned into a growth opportunity. Fiscal balance is the residual of debt management, and bears analogies with the cash flow, investment, dividends and debt management policies of corporations (Koussis, Martzoukos and Trigeorgis, 2017). What are the appropriate incentives for various players, such as citizens as principals or statesmen as agents, or sovereign debt holders including central governments as residual balancing institutions?…”

Ownership Concentration, Corporate Liquidity, and Dividend Payment Policy: Evidence from Indonesian Financial Industries

“…Similar to the study by Watts (1973, cited in Esqueda, 2016, Esqueda shows that dividend payment provides information about the expected future cash flows of the corporation. Koussis, Martzoukos, and Trigeorgis (2016) in their study stated that the retained earnings are acquired as liquid assets that earn a specified interest periodically and can be used to decrease external financing in the future and guard against incurring bankruptcy costs and costly default risk. This study contributed to the explanation of the negative disincentive effect to save as cumulated cash savings, which can be lost at default regarding considering limited liability and quantifying the trade-off between the standard cost of savings and other important offsetting benefits.…”