Why Do U.S. Firms Hold so Much More Cash than They Used to?

Bates, Thomas W.; Kahle, Kathleen M.; Stulz, René M.

doi:10.2139/ssrn.927962

Cited by 686 publications

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“…Our modeling approach uses the cross section regression developed by Opler et al (1999) and Bates et al (2009), which they used to identify the determinants of cash holdings by firms. The model regresses the cash-toasset ratio onto determinants reflecting investment opportunities (including the market-to-book ratio and capital expenditures), size, leverage, growth opportunities, dividends, large investments (acquisition activities), and precautionary savings motives.…”

Section: Methodsmentioning

confidence: 99%

“…We use this as a reflection of how positive a manager feels towards the firm's investment activity and its future performance. The regression models for examining motives for cash holdings that we use in this paper draw upon the models proposed by Opler, Pinkowitz, Stulz and Williamson (1999) and Bates, Kahle, and Stulz (2009), who find that average firms would hold more cash if their growth opportunities are strong.…”

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confidence: 99%

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Motives for corporate cash holdings: the CEO optimism effect

Huang

Lambertides

Steeley

2015

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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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Section: Methodsmentioning

confidence: 99%

mentioning

confidence: 99%

Motives for corporate cash holdings: the CEO optimism effect

Huang

Lambertides

Steeley

2015

Rev Quant Finan Acc

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“…The baseline analysis includes a total of 766 firms. 3 Bond issuance by our sample of firms was on a rising trend before the global financial crisis hit, it contracted in 2008 and then boomed over 2009-2013 (Figure 1).…”

Section: Datamentioning

confidence: 96%

“…As we built our dataset of bond issuance at the parent level, our measure of bond issuance for each firm includes all bonds issued under the name of the firm itself and all 3 We have less than 50 firms in countries where there are less than 50 listed domestically owned nonfinancial corporations. 4 We downloaded data for all firms listed in the eighteen emerging markets of interest.…”

Section: Datamentioning

confidence: 99%

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The Second Wave of Global Liquidity: Why are Firms Acting Like Financial Intermediaries?

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The second wave of global liquidity: Why are firms acting like financial intermediaries? Terms of use: Documents inJulian CaballeroInter-American Development Bank Ugo PanizzaThe Graduate Institute, Geneva and CEPR Andrew PowellInter-American Development Bank AbstractRecent work suggests that non-financial firms have acted like financial intermediaries particularly in emerging economies. We corroborate these findings but then ask why? Our results indicate evidence for carry-trade activities but focused in countries with higher levels of capital controls, particular controls on inflows. We find little evidence for such activities given other potential motives. We posit that this phenomenon is due more to the reaction to low global interest rates and strong capital inflows than to incomplete markets or the retreat of global banks due to impaired balance-sheets or tighter regulations.

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Corporate commitment to climate change action, carbon risk exposure, and a firm's debt financing policy

2021

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Motivated by the rising consensus that corporate engagement in climate change actions holds the key for society's transition into environmentally resilient economy, the study examines whether a firm's commitment to climate change action and its carbon risk exposure shape the firm's debt financing policy. Based on insights drawn from signaling, corporate reputation, and agency theories, we develop models that link corporate commitment to climate change actions and a firm's carbon risk exposure with its debt financing decisions. Using data drawn from S&P 500 companies, for years 2015 to 2019, we find a robust evidence that firms that engage in higher levels of commitment to climate change actions issue a higher proportion of debt with longer terms to maturity, even after controlling for their carbon risk exposure. However, we do not find a robust evidence corroborating an association between firms' carbon risk exposure and their debt financing policy. These findings are consistent with arguments that high-commitment firms enjoy positive reputation, better credit rating, and reduced agency and information asymmetry costs, allowing them to gain easier access to long-term debt markets.climate change, corporate carbon commitment, corporate carbon risk, debt financing policies | INTRODUCTIONCorporate debt financing policies and their interactions with agency and information asymmetry costs have received considerable attention in corporate finance and governance research. This is partly due to the importance of making optimal debt financing decisions in resolving agency problems (Myers, 1977), liquidity risks (Diamond, 1991), and information asymmetry and signaling challenges (Flannery, 1986). Notwithstanding the enormous role that corporate commitment to climate change actions could play in society's transition into low carbon and environmentally resilient economy (Bridge et al., 2020;Pinkse & Kolk, 2010;Richardson, 2009) and the observation that companies have begun considering climate change issues in their strategic positioning (Lee, 2012), no prior study has examined the interplay between a firm's commitment to climate change actions and its debt financing policy. This is a significant omission considering that corporate activities are widely deemed to be the primary drivers of climate change (Cadez et al., 2019;Dahlmann et al., 2019) and that a firm's climate change-related activities interact with its financing decisions (e.g., Jung et al., 2018;Lemma et al., 2019). The present study attempts to fill this void by investigating whether a firm's commitment to climate change actions shape its debt maturity structure.Corporate commitment to climate change actions comprises a gamut of a firm's climate change-related activities including the disclosure of its Greenhouse Gas (GHG) emissions; integration of its GHG emissions, strategies, and actions; benchmarking of its GHG emissions performance against industrywide performance; and the degree to which it demonstrates "climate leadership" by implementing best practices (B...

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Why Do U.S. Firms Hold so Much More Cash than They Used to?

Cited by 686 publications

References 35 publications

Motives for corporate cash holdings: the CEO optimism effect

Motives for corporate cash holdings: the CEO optimism effect

The Second Wave of Global Liquidity: Why are Firms Acting Like Financial Intermediaries?

Corporate commitment to climate change action, carbon risk exposure, and a firm's debt financing policy

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