Ebook Three Essays on Corporate Cash Holdings
Why firms hold cash? How they save? Is there an optimal level of liquid assets? What factors influence these choices? How cash holdings affect firm value and performance? How they impact the rest the economy? These questions are of long standing and lie at the heart of corporate finance. Indeed, from funding day-to-day operations to financing long-run investment, internal funds represent the simple most important source of financing. According to Mayer (1990), approximately 75% of all net financing occurs through the use of cash reserves, as opposed to debt, convertibles and equity.
As a result, understanding cash policy appears to be an essential element if we want to enrich our knowledge of how corporations are financed, and what are the real implications of their financing choices. Surprisingly, despite their ubiquitous role in corporate life, cash holdings have long been left unexplored by finance researchers. Recently, however, the finance profession has progressively started to pay a closer attention to firms’ cash positions. By and large, two related facts have contributed to place corporate cash holdings under the spotlight.
First, this growing attention takes root in the observed tendency of firms to stockpile unusually large amount of cash. For instance, Microsoft Corp. and Exxon Mobile Corp. had more than $30 billion in cash sitting in the bank at the end of 2006. Apple Inc. and Google Inc. held more than $10 billion. These colossal positions are not isolated cases but generalize to a vast majority of firms. According to an estimate by The Economist, the average American public firm held more than 15% of its total assets in the form of cash and equivalent at the end of 2005. Notably, such a hoarding trend is not bounded to US companies but spreads out worldwide. Unsurprisingly, this universal phenomenon has not escaped the notice of investors and has attracted much coverage in the media and political circles. Overall, observers have casted serious doubt on the rationale for holding so much cash and are largely worried about the potential consequences of such cash-heavy status.
In parallel, surveys of corporate executives highlight indirectly the relevance of cash holdings in firms’ financial strategy. As a matter of fact, Harvey and Graham (2001) and Bancel and Mittoo (2004) report evidence that raise many questions about the validity of existing theories of financing choices. In contrast to many theoretical predictions, corporate executives emphasize that the most important driver of their financing strategy is the desire to attain and preserve financial flexibility. Arguably, cash reserves play a major role in shaping firms’ flexibility. Indeed, with cash on hand firms secure their ability to finance current and future growth opportunities. As such, recent survey evidence bolsters the idea that cash holdings represent a substantial component of firms’ optimal financing structure.
contents
Introduction
Chapter 1: Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings
- 1.1. Introduction
1.2. Related literature and hypothesis development
1.3. Methodology and data
- 1.3.1. Identifying the impact of cash on product market outcomes
1.3.2. Endogeneity of cash holdings
1.3.3. Sample construction and industry definition
1.4. Results: The effect of cash on market share growth
- 1.4.1. Main findings
1.4.2. Characterization: Interindustry differences
1.4.3. Impact on firm value and operating performance
1.5. The origins of the competitive effect of cash
- 1.5.1. The use of war chests
1.5.2. The preemptive effects
1.6. Conclusions
1.7. Appendix A : Definition of the main variables
1.8. Appendix B: Descriptive Statistics
1.9. Appendix C: Evolution through time
Chapter 2: Corporate savings and Stock Price Informativeness
- 2.1. Introduction
2.2. Related literature and hypothesis development
2.3. Methodology and data
- 2.3.1. Measuring the sensitivity of savings to price: econometric specification
2.3.2. Sample and summary statistics
2.4. Main results
- 2.4.1. The effect of price informativeness on the savings-to-price sensitivity
2.4.2. Sensitivity Analysis
2.4.3. Market mispricing
2.4.4. Financing constraints
2.4.5. Other sources of information
2.4.6. Price informativeness, savings and future operating performance
2.5. Conclusions
2.6. Appendix : Definition of the main variables used in the analysis
Chapter 3: The value of excess cash and corporate governance: Evidence from U.S. cross-listings
- 3.1. Introduction
3.2. Related literature and hypothesis development
3.3. Methodology and Data
- 3.3.1. Measuring investors’ valuation of excess cash holdings
3.3.2. Data and descriptive statistics
3.4. Main Results
- 3.4.1. Comparison of cross-listed with non-cross-listed firms
3.4.2. Sensitivity analyses
3.4.3. Further tests to control for growth options
3.4.4. Change in the value of excess cash (pre- versus post-cross-listing)
3.4.5. Does the country of origin matter?
3.4.6. What are the governance mechanisms at work?
3.4.7. Is there still an effect today?
3.5. Conclusion
3.6. Appendix: Computing excess cash holdings
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