Partial adjustment toward optimal cash holding levels

Abstract

Recognizing that industry and capital market conditions may impede a firm's desire to achieve its targeted cash holding levels, we estimate a dynamic model that allows firms to adjust their cash holding levels over time and find evidence consistent with a trade‐off type behavior in cash holding levels. We estimate a partial adjustment model and find that firms rapidly correct any deviation from their targeted cash levels. A typical firm in our sample closes this gap within two years. Inconsistent with the agency view of excess cash holdings, we find that cash holding levels for firms with excess cash persists over time compared to those that have a deficit. We also find that smaller firms typically hold excess cash and are quicker to correct deviations than large firms consistent with the view that it is more costly for financially constrained firms to operate at sub‐optimal levels of liquid assets.

Adjustment behavior of corporate cash holdings: the China experience

“…Once again, the fact that the absolute value of the coefficient (β) is less than 1 suggests that cash balances display mean-reverting properties. This finding is consistent with Opler et al (1999) and Venkiteshwaran (2011). 14…”

“…We observe that the average cash flow to assets ratio is 4.7%; the average capital expenditure to assets ratio, 5.8%; the average leverage ratio, 23.2%; and average cash flow volatility, 8.7%. These figures are largely consistent with those reported for US firms by Opler et al (1999) and Venkiteshwaran (2011); for EMU and UK firms, by Ferreira and Vilela (2004) and Ozkan and Ozkan (2004); and for Chinese firms, by Alles, Lian, and Xu (2012). Additionally, Table 3 shows that on average, the return on assets (ROA) is 2.3% and Tobin's Q is greater than 1 (1.75).…”

“…This is comparable to the ratios observed for US and UK firms. 6 However, the median cash-to-assets ratio is 12.1%, higher than the median ratios observed in the West, which range between 3% for Canadian firms and 9% for French firms (Opler et al 1999;Ozkan and Ozkan 2004;Dittmar and Mahrt-Smith 2007;Harford, Mansi, and Maxwell 2008;Riddick and Whited 2009;Venkiteshwaran 2011). Chinese firms also hold a relatively higher median percentage of cash reserves than most of the developed countries analyzed by Dittmar, Mahrt-Smith, and Servaes (2003) and Riddick and Whited (2009), for which the median cashto-assets ratio is 6.3% and 6.2%, respectively.…”

“…The European Journal of Finance 11 is also reported for US manufacturing firms by Venkiteshwaran (2011), and for Chinese listed companies by Lian, Xu, and Zhou (2012). 16…”

Determinantes del nivel de efectivo de las compañías colombianas

“…Se considera que el nivel de efectivo obedece a un proceso de ajuste parcial, por lo cual se asume que cada compañía de la muestra tiene un nivel óptimo de efectivo (Venkiteshwaran, 2011;Bigelli & Sánchez-Vidal, 2012 …”