Firm structure and corporate cash holdings

Subramaniam, Venkat; Tang, Tony T.; Yue, Heng; Zhou, Xin

doi:10.1016/j.jcorpfin.2010.06.002

Cited by 181 publications

(92 citation statements)

References 39 publications

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“…Duchin (2010) finds that diversified firms hold less cash compared to their stand-alone counterparts, showing an efficient link between firm diversification and liquidity. Subramaniam et al (2011) confirm these findings and attribute the lower cash holding to complementary growth opportunities across different segments and the availability of internal capital markets. However, some recent studies still continue to show a diversification discount for financial firms even after controlling for endogeneity and data issues (Laeven and Levine 2007).…”

Section: Literature Review and Hypothesis Developmentsupporting

confidence: 69%

A Re-Examination of Diversification and Firm Productivity

Chang

Fernando

Srinivasan

et al. 2013

Journal of Management Accounting Research

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The advantages and disadvantages of diversification have been widely debated by academics, as well as business professionals, and the majority of studies suggest that diversification destroys firm value. The effect of overall diversification (without categorizing whether such diversification is related or unrelated to the business) on productivity has been investigated as well, but with similar conflicting results. In this paper, we investigate the effects of the two types of diversification on productivity. We find that related diversification enhances firm productivity, whereas unrelated diversification reduces firm productivity. We also find that the previously recorded link between diversification and firm value is partially mediated by productivity. Our paper offers further empirical evidence toward resolving the conflicting findings of prior research, and provides practitioners with additional points for consideration when engaging in firm diversification.

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Section: Literature Review and Hypothesis Developmentsupporting

confidence: 69%

A Re-Examination of Diversification and Firm Productivity

Chang

Fernando

Srinivasan

et al. 2013

Journal of Management Accounting Research

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“…We use three variables-Market to Book ratio, calculated as the ratio of market value of equity to the book value of equity; Capital Expenditures, defined as the ratio of capital expenditures to total assets; and Net Working Capital, calculated as net working capital (less cash) divided by total assets-to control for a firm's investments requirements. Following Subramaniam et al (2011), we define Inefficiency as the interaction between capital expenditures scaled by total assets and a dummy variable that is one if a firm's Tobin's Q is lower than the industry's median, and zero otherwise. Firms with more inefficient investments are more likely to face greater financial constraints (Subramaniam et al, 2011).…”

Section: B Determinants Of Financial Constraintsmentioning

confidence: 99%

Corporate Governance, Tax Avoidance, and Financial Constraints

Bayar¹,

Huseynov²,

Sardarli

2018

Financial Management

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We examine how corporate governance affects the relationship between corporate tax avoidance and financial constraints. Conditional on having poor governance, tax avoidance is associated with greater financial constraints and a greater likelihood of financial distress. In firms with strong governance, however, we find that tax avoidance does not have a negative impact on financial constraints. Our results suggest that tax avoidance is a less useful source of financing for constrained firms when they are plagued with potential agency problems and opaque information environments. Stronger governance mechanisms can help firms mitigate the negative consequences of tax avoidance.

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“…So, we expect small firms to hold relatively more cash to avoid financial distress/failures (Opler et al 1999). Conversely, firms with greater access to capital markets, i.e., large firms (with less asymmetric information problems) hold lower levels of cash (this is true for diversified firms also (see Subramaniam et al 2011). This implies a risk-seeking attitude for larger firms and an opposite mindset by their smaller counterparts.…”

Section: Literature Reviewmentioning

confidence: 99%

Firm’s Risk-Return Association Facets and Prospect Theory Findings—An Emerging versus Developed Country Context

Gupta¹,

Pathak²

2018

Risks

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A risk-return association under normal market conditions can be conventional positive (risk-averse) or "paradoxical" negative (risk seeking). This study has the objective to investigate whether such an association is stable across market trends (i.e., bull and bear) and for overall, industry-classified and partitions sub-samples after controlling for a firm's age, size, leverage and liquidity using operating performance risk-return measures. In total, this study analyses 2666 firms (1199 firms from 15 developed countries and 1467 firms from 12 emerging countries) for the period of 1999-2015. Results show that in the overall and bull sub-periods, firms across countries are showing conventional positive (superior firms) and "paradoxical" negative (poor firms) in most cases. However, in the bear sub-periods all firms from emerging countries are risk seeking in order to maintain their position in the pecking order.Empirical literature associates managers' risk behavior with assumptions of rational behavior, outcome weighing and utility maximization. Financial theory also posits that risk-averse behavior manifests when low risk is associated with low return, as well as when high risk is rewarded by high return (Fisher and Hall 1969). This risk-averse outlook also assumes that for each strategic alternative, firms and managers would choose the alternative which maximizes utility (Schoemaker 1982). Aaker and Jacobson (1987) find support for a positive association between performance and both systematic and unsystematic risk, when risk is defined using accounting data. A number of other studies have also found support for a positive risk-return relationship (Bettis 1981).To provide a theoretical lens to explain the negative association between risk and return, scholars have drawn motivation from prospect theory (Fiegenbaum and Thomas 1988;Kahneman and Tversky 1979) and behavioral theory of the firm (Bromiley 1991). Under the behavioral theory of the firm, managers undertake more risk when performance is below aspiration, and they take low risk when performance is above aspirations. Due to the contemporaneous association between risk-taking and low performance, this relationship could be negative. This is due to lower performance and higher risk in cross-sectional accounting data, or lagging effects of risk and performance would continue in the short-term in longitudinal accounting data. On the other hand, prospect theory (Kahneman and Tversky 1979) studies argue that managers in low performing firms face negatively framed prospects and are thus more likely to undertake high risk. In contrast, managers in high-performing firms face positively framed prospects and take low risk. Both of these results would cause negative correlation between high performance and low risk. Thus, prospect theory and behavioral theory of the firm provide possible explanations for the negative risk-return relationships.The research hypotheses in these studies emphasizes on manager's and/or firm's attainment of above (below) returns in compariso...

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Firm structure and corporate cash holdings

Cited by 181 publications

References 39 publications

A Re-Examination of Diversification and Firm Productivity

A Re-Examination of Diversification and Firm Productivity

Corporate Governance, Tax Avoidance, and Financial Constraints

Firm’s Risk-Return Association Facets and Prospect Theory Findings—An Emerging versus Developed Country Context

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