The asymmetry in firms’ mechanisms of cash holdings adjustments: evidence from the G-5 economies

Abstract

Using a G-5 country sample (France, Germany, Japan, the UK, and the US) from 1980 to 2007, I find new evidence of the asymmetry in firms' mechanisms of cash holdings adjustments. They undertake different approaches to move toward their target cash holdings levels conditional on whether they have below-or above-target cash holdings. Specifically, firms with above-target cash holdings adjust mainly via changes in cash flows from financing and investing. They generally reduce their levels of equity proceeds, net debt issues and fixed asset disposal but increase their levels of equity repurchases, dividend payout, net assets from acquisitions, portfolio and short-term investments, and capital expenditures. However, firms with below-target cash holdings adjust mainly via changes in operating cash flows, i.e., they increase their levels of funds from operations but reduce their levels of working capital. The mechanisms undertaken by firms with above-target cash holdings allow them to adjust toward their target cash holdings relatively faster than those with below-target cash holdings, as they possibly incur lower costs than the mechanisms experienced by firms with below-target cash holdings. The results highlight the importance of understanding the asymmetry in firms' mechanisms of cash holdings adjustments when analyzing how they adjust toward their target cash holdings levels.

How optimal cash changed by the global financial crisis? A multi-country analysis

“…Next, I exclude firms in two highest proportion of countries: Japan and the US in Panel B, then firms in five highest proportion of countries: India, Japan, Korea, the UK and the US from the whole sample for the sample composition. Finally, I employ the system GMM in Panel D, as the literature commonly uses (Ozkan and Ozkan 2004;Bates et al 2018;Nguyen 2019). The robustness results are qualitatively similar to the main results.…”

“…The optimal amount of cash holdings is also crucial for the trade-off between benefits and costs adjusting cash retention as has been found by empirical research (Ozkan and Ozkan 2004;Bates et al 2018;Nguyen 2019). However, firms may face different cost levels when carrying cash due to the actual cash amount, whereas it can be difficult to adjust their cash level.…”

“…For example, Lozano and Duran (2017) comment on how family firms adjust their cash towards the targetcash faster by 3% than non-family firms because family firms have greater cash than non-family firms. Furthermore, Nguyen (2019) finds that the SOA of firms with above-target cash holdings are relatively faster than those with below-target cash holdings. In this case, the cash level easily allows to adjust toward target cash holdings.…”

“…Firms need to adjust their cash towards the target cash in time; that is why a partial adjustment may be necessary. Thus, the partial adjustment model of Ozkan and Ozkan (2004) is used to examine the cash holdings' adjustments, as the more recent research does (Lozano and Duran 2017;Bates et al 2018;Martinez-Sola et al 2018;Nguyen 2019).…”

“…This research uses the partial adjustment model, as employed by recent research to test hypotheses (Ozkan and Ozkan 2004;Lozano and Duran 2017;Bates et al 2018;Martinez-Sola et al 2018;Nguyen 2019). The procedure of partial adjustment model is stated below:…”