Corporate precautionary cash holdings

Han, Seungjin; Qiu, Jiaping

doi:10.1016/j.jcorpfin.2006.05.002

Cited by 701 publications

(481 citation statements)

References 19 publications

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“…On the other hand, low growth firms have less estimated coefficients. These results support the Almeida et al, (2004) estimation, that high growth firms (financiallyconstrained firms) pursue the policies of greater retention of cash, (Han & Qiu, 2007;Riddick & Whited, 2009;Denis & Sibilkov, 2009). Furthermore, Tobin's Q could also affect the cash policy of firm.…”

Section: Growth Opportunitiessupporting

confidence: 76%

Firm Characteristics and Cash-Cash Flow Sensitivity of the Manufacturing Sector of Pakistan

Haq¹

2017

BER

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Section: Growth Opportunitiessupporting

confidence: 76%

Firm Characteristics and Cash-Cash Flow Sensitivity of the Manufacturing Sector of Pakistan

Haq¹

2017

BER

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“…Firms with greater earnings or those presumed 7 Managerial ownership has been found to influence cash holdings in many countries, see, for example, Luo and Hachiya (2005) for Japan and Yu, Sopranzetti, and Lee (2015) for Taiwan. 8 Han and Qiu (2007) and Riddick and Whited (2009) level, managers may seek to reduce cash holdings, giving rise to a concave relationship with ownership. The data used to measure each of the explanatory variables is described in Section 3 below and in more detail in Appendix 1.…”

Section: Methodsmentioning

confidence: 99%

Motives for corporate cash holdings: the CEO optimism effect

Huang

Lambertides

Steeley

2015

Rev Quant Finan Acc

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We examine the chief executive officer (CEO) optimism effect on managerial motives for cash holdings and find that optimistic and non-optimistic managers have significantly dissimilar purposes for holding more cash. This is consistent with both theory and evidence that optimistic managers are reluctant to use external funds. Optimistic managers hoard cash for growth opportunities, use relatively more cash for capital expenditure and acquisitions, and save more cash in adverse conditions. By contrast, they hold fewer inventories and receivables and their precautionary demand for cash holdings is less than that of non-optimistic managers. In addition, we consider debt conservatism in our model and find no evidence that optimistic managers' cash hoarding is related to their preference to use debt conservatively. We also document that optimistic managers hold more cash in bad times than non-optimistic managers do. Our work highlights the crucial role that CEO characteristics play in shaping corporate cash holding policy. KeywordsCash holdings · Liquidity · Cash holdings motive · CEO optimism JEL Classification G30 · G32 · G02 2 IntroductionThe role of cash reserves in corporate financing and investment decisions is changing. Keynes (1936) Yermack (1995). 3 In general, external financing is more expensive than internal financing for firms, particularly for financially constrained firms. Biased managers are much more reluctant to use outside financing than rational managers, since they believe firm value is underestimated in the financial markets and the cost of external financing is thus overpriced. Malmendier and Tate (2005a) find that corporate investment decisions made by overconfident chief executive officers (CEOs) are substantially related to internal funds. Heaton (2002) builds a model to show that optimistic managers will decline positive NPV projects if they have to fund externally for these projects. Hackbarth (2008) shows theoretically that biased managers have higher debt levels than unbiased managers. 4Although prior studies have examined the impact of CEO optimism and overconfidence on corporate decisions, relatively few prior investigations try to determine differences between optimistic and non-optimistic managers in controlling and operating firm liquid assets (motives for cash holdings). To the best of our knowledge, the most relevant papers, though indirectly related, to a connection between CEO overconfidence and cash holdings are those of Malmendier and Tate ( who holds options more than 100% in-the-money is considered to be relatively optimistic. A detailed explanation of the CEO optimism measure is introduced in Section 3. 4 We also consider a less stringent 67% cutoff, which allows us to examine the extent of the CEO optimism effect on the motives for holding cash. This options based measure is widely used in models designed to understand managerial decision making in firms, and there is therefore value in maintaining consistency with these parallel literatures. For example, studies ...

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“…The investment-cash flow sensitivity literature (e.g., Gilchrist and Himmelberg (1995) and Erickson and Whited (2000)) and the cash holdings literature (e.g., Han and Qiu (2007)) suggest that firm size is inversely related to the extent of information asymmetry. In addition, older, more established firms are likely to be characterized by a lower degree of information asymmetry and lower costs of external financing than younger firms.…”

Section: Measures Of Financial Constraintsmentioning

confidence: 99%

Cash Holdings, Competition, and Innovation

Lyandres

Palazzo

2016

J. Financ. Quant. Anal.

213

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We demonstrate theoretically and empirically that strategic considerations are important in shaping cash policies of innovative firms. In our model, firms decide whether to invest in innovation while facing uncertainty regarding the structure of ensuing product markets. Cash holdings reduce innovative firms' dependence on external financing and, therefore, serve as a commitment device for future investment. We show that firms' equilibrium cash holdings are related to expected intensity of competition in future product markets and that this relation is affected by the degree of financial constraints that firms face. We test our model using a sample of firms that are direct competitors in innovation. Consistent with the strategic motive for hoarding cash, we show that firms' cash holdings are negatively affected by their rivals' cash holding choices, more so when competition is expected to be intense. In addition, we examine two instances of exogenous shocks to firms' costs of external financing and show that financial constrains influence the relation between firms' cash holdings and expected competition intensity in ways consistent with the model's predictions.

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Corporate precautionary cash holdings

Cited by 701 publications

References 19 publications

Firm Characteristics and Cash-Cash Flow Sensitivity of the Manufacturing Sector of Pakistan

Firm Characteristics and Cash-Cash Flow Sensitivity of the Manufacturing Sector of Pakistan

Motives for corporate cash holdings: the CEO optimism effect

Cash Holdings, Competition, and Innovation

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