Abstract
The determinants of firms’ cash holdings have been debated in many previous studies. Given the advances in information technology and financial instruments over the last two decades, one would expect that firms’ demand for liquidity based on the transaction motive has declined considerably. Yet, using a new, comprehensive dataset of about 60,000 firms, we find that corporate cash holdings have sharply increased since the 1990s and peaked in most advanced economies during the financial and economic crisis of 2008. Our analysis shows that instead of transaction motives, rather risk considerations and financing constraints are the main drivers of corporate liquidity. The increase of cash holdings is not universal: In contrast to previous studies, we emphasizes the heterogeneity of firm characteristics and the impact of various risk variables, including macroeconomic uncertainty. We show that financially constrained firms accumulated significantly more liquidity prior to the crisis and burnt through larger amounts of cash in the aftermath than non-constrained firms. Smaller, younger, and financially more vulnerable firms were more subject to idiosyncratic and aggregate risk. This pattern is observable for most OECD economies, while some differences emerge with respect to Chinese and Indian firms.
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Notes
- 1.
Note: These ratios are comparable with findings in Bates et al. (2009), see Table I, p. 1991.
- 2.
We ignore the first observations for China due to the small sample size. For years 1990–1992 only between six and ten firms report cash holdings and we consider this number too small to be representative. After 1995 the sample size in China reaches 80–100 firms and increases to more than 1000 firms after 1999.
- 3.
OPSW.
- 4.
Net debt equals debt minus cash.
- 5.
- 6.
On the macroeconomic level CASHEQ would roughly correspond with M1 while CASH would be the equivalent of M0. The two measures are also highly correlated (0.77).
- 7.
An industry is classified by the first two digits of the industry code.
- 8.
Shyam and Sunder (1999) measure the internal deficit process via the variable DEF t in their Eqs. (1) and (2). The regression proposed in Eq. (2) is not if, for example, the amount of capital expenditures in t or the amount of dividends in t also depends on the overall amount of the deficit. In other words, if managers cut dividends or reduce investment in order to reduce the deficit and thus the amount of necessary financing, we would face an endogeneity problem.
- 9.
While both variables, LEV and DER, measure indebtedness, their accounting definitions in FactSet reveal some minor differences: Total debt (td) is the sum of short term and long term debt (credits). the debt-to-equity ratio (DER) is then defined as total debt over common equity. The leverage (LEV) is defined as total debt over common equity plus total liabilities (= total assets). Total liabilities include total debt but also several other positions such as accounts payable or provisions.
- 10.
For all other regions, means and medians show the same evolution.
- 11.
Findings for Hong Kong, Taiwan and South Africa match those of China and India.
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Appendix: Summary Statistics After Modified Baum Correction
Appendix: Summary Statistics After Modified Baum Correction
CASHEQ is cash and cash equivalents over total assets (TA). CAPEX is capital expenditures over TA. DIV is dividends over TA. OPM is the profit margin (Net Income over Revenue). DPR is Dividend Payout Ratio (Dividends over Net Income). LEV is leverage (Debt over TA). MTB is the market-to-book ratio. EMP is total employment in 1000. VOLA is the yearly stock price volatility. RET is retained earnings over TA. DER is the debt-equity ratio. SBB is share buybacks over TA. CFO is cash from operations over TA. EQ is equity over TA. REV is revenue over equity. ROA is return on assets (Net Income over TA). EIR is the effective interest rate (interest expense over debt). LTA is the log of TA. CA is current assets over TA. LIQ is Liquidity: (Working Capital minus Cash) over TA. CF is Cash Flow: (Gross income + depreciation) over TA. TAX is total income tax over TA. RAT is the FactSet Rating. DY is Dividend Yield. PR is the Profit Rate (Net income over Equity). RD is R&D expenditures over TA. FINC is foreign income as % of total income. FTAX is income tax paid abroad as % of total income tax. IPO is years since IPO.
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Samaan, D., Schott, I. (2016). Corporate Liquidity under Financial Constraints and Macroeconomic Uncertainty. In: Bernard, L., Nyambuu, U. (eds) Dynamic Modeling, Empirical Macroeconomics, and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-39887-7_10
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