Why do corporate cash holdings differ within reunified Germany?

Abstract

This study examines German firms’ managerial decision-making from the perspective of corporate cash holdings. An econometric analysis of 89,018 firm-year observations for 2004–2016 shows that East German firms hold significantly more cash than their West German counterparts. It is further demonstrated that no reasonable hypotheses (i.e. structural differences, access to financing, and historical differences) can explain East German firms’ higher cash holdings. Instead, the difference in cash holdings is only relevant for small- and medium-sized enterprises (SMEs). Additionally, East German SMEs adjust excess cash more slowly than West German SMEs. These findings are consistent with the hypothesis that cultural attributes influence managerial decision-making and imply that the norms and values of the former German Democratic Republic persist.