Skip to main content
SpringerLink
Log in

Corporate cash holdings: Evidence from Switzerland

  • Published:
Financial Markets and Portfolio Management Aims and scope Submit manuscript

Abstract

This paper investigates the determinants of cash holdings for a comprehensive sample of Swiss non-financial firms between 1995 and 2004. The median Swiss firm holds almost twice as much cash and cash equivalents as the median US or UK firm. Our results indicate that asset tangibility and firm size are both negatively related to corporate cash holdings, and that there is a non-linear relationship between the leverage ratio and liquidity. Dividend payments and operating cash flows are positively related to cash reserves, but we cannot detect a significant relationship between growth opportunities and cash holdings. Most of these empirical findings, but not all of them, can be explained by the transaction costs motive and/or the precautionary motive. Analyzing the corporate governance structures of Swiss firms, we document a non-linear relationship between managerial ownership and cash holdings, indicating an incentive alignment effect and an opposing effect related to increasing risk aversion. Finally, our results suggest that firms in which the CEO simultaneously serves as the COB hold significantly more cash.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Altman, E.I.: Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J. Finance 23(4), 589–609 (1968)

    Article  Google Scholar 

  • Arellano, M., Bond, S.: Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev. Econ. Stud. 58(194), 277–297 (1991)

    Google Scholar 

  • Barclay, M.J., Holderness, C.G.: Private benefits from control of public corporations. J. Financ. Econ. 25(2), 371–395 (1989)

    Article  Google Scholar 

  • Barclay, M.J., Smith, C.W.: On financial architecture: Leverage maturity, and priority. J. Appl. Corp. Finance 8(4), 4–17 (1995)

    Article  Google Scholar 

  • Baskin, J.: Corporate liquidity in games of monopoly power. Rev. Econ. Stat. 69(2), 312–319 (1987)

    Article  Google Scholar 

  • Beiner, S., Drobetz, W., Schmid, F., Zimmermann, H.: Is board size an independent corporate governance mechanism? Kyklos 57, 327–358 (2004)

    Article  Google Scholar 

  • Börsch-Supan, A., Köke, J.: An applied econometricians’ view of empirical corporate governance studies. Ger. Econ. Rev. 3(3), 295–326 (2002)

    Article  Google Scholar 

  • Brav, A., Graham, J.R., Harvey, C.R., Michaely, R.: Payout policy in the 21st century. J. Financ. Econ. 77(3), 483–527 (2005)

    Article  Google Scholar 

  • Brennan, M.J., Hughes, P.J.: Stock prices and the supply of information. J. Finance 46(5), 1665–1691 (1991)

    Article  Google Scholar 

  • Collins, D., Rozeff, M., Dhaliwal, D.: The economic determinants of the market reaction to proposed mandatory accounting changes in the oil and gas industry. J. Account. Econ. 3(1), 37–71 (1981)

    Article  Google Scholar 

  • Couderc, N.: Corporate cash holdings: financial determinants and consequences. Working Paper (2005)

  • Dahya, J., Travlos, N.: Does the one man show pay? Theory and evidence on the dual CEO revisited. Eur. Financ. Manag. 6(1), 461–483 (2000)

    Article  Google Scholar 

  • De Miguel, A., Pindado, J.: Determinants of the capital structure: New evidence from Spanish panel data. J. Corp. Finance 7(1), 77–99 (2001)

    Article  Google Scholar 

  • Deloof, M.: Belgian intragroup relations and the determinants of corporate liquid reserves. Eur. Financ. Manag. 7(3), 375–392 (2001)

    Article  Google Scholar 

  • Dittmar, A., Mahrt-Smith, J.: Corporate governance and the value of cash holdings. J. Financ. Econ. 83(3), 599–634 (2007)

    Article  Google Scholar 

  • Dittmar, A., Mahrt-Smith, J., Servaes, H.: International corporate governance and corporate cash holdings. J. Financ. Quant. Anal. 38(1), 111–133 (2003)

    Google Scholar 

  • Drobetz, W., Fix, R.: What are the determinants of the capital structure? Evidence from Switzerland. Swiss J. Econ. Stat. 151(1), 71–114 (2005)

    Google Scholar 

  • Dyck, A., Zingales, L.: Private benefits of control: An international comparison. J. Finance 59(2), 537–600 (2004)

    Article  Google Scholar 

  • Fama, E.F., Jensen, M.C.: Separation of ownership and control. J. Law Econ. 26(2), 301–326 (1983)

    Article  Google Scholar 

  • Fazzari, S.M., Petersen, B.C.: Working capital and fixed investment: New evidence on financing constraints. RAND J. Econ. 24(3), 328–342 (1993)

    Article  Google Scholar 

  • Faulkender, M.: Cash holdings among small businesses. Working Paper (2004)

  • Faulkender, M., Wang, R.: Corporate financial policy and the value of cash. J. Finance 61(4), 1975–1990 (2006)

    Article  Google Scholar 

  • Ferreira, M.A., Vilela, A.S.: Why do firms hold cash? Evidence from EMU countries. Eur. Financ. Manag. 10(2), 295–319 (2004)

    Article  Google Scholar 

  • García-Teruel, P.J., Martínez-Solano, P.: On the determinants of SMES cash holding: Evidence form Spain. Working Paper (2004)

  • Guney, Y., Ozkan, A., Ozkan, N.: Additional international evidence on corporate cash holdings. Working Paper (2003)

  • Harford, J.: Corporate cash reserves and acquisitions. J. Finance 54(6), 1969–1997 (1999)

    Article  Google Scholar 

  • Harford, J., Mansi, S.A., Maxwell, W.F.: Corporate governance and firm cash holdings. Working Paper (2004)

  • Harris, M., Raviv, A.: The theory of the capital structure. J. Finance 46(1), 297–355 (1991)

    Article  Google Scholar 

  • Hermalin, B.E., Weisbach, M.S.: Boards of directors as an endogenously determined institution: A survey of the economic literature. Econ. Policy Rev. 9(1), 7–26 (2003)

    Google Scholar 

  • Hausman, J.A.: Specification tests in econometrics. Econometrica 46(6), 1251–1271 (1978)

    Article  Google Scholar 

  • Himmelberg, C., Hubbard, G., Palia, D.: Understanding the determinants of managerial ownership and the link between ownership and performance. J. Financ. Econ. 53, 353–384 (1999)

    Article  Google Scholar 

  • Iona, A., Leonida, L., Ozkan, A.: Determinants of financial conservatism: Evidence from low-leverage and cash-rich UK firms. Working Paper (2004)

  • Jani, E., Hoesli, M., Bender, A.: Corporate cash holdings and agency conflicts. Working Paper, University of Geneva (2004)

  • Jarque, C.M., Bera, A.K.: Efficient tests for normality homoscedasticity and serial independence of regression residuals. Econom. Lett. 6(3), 255–259 (1980)

    Article  Google Scholar 

  • Jensen, M.: Agency cost of free cash flow, corporate finance, and takeovers. Am. Econom. Rev. 76(2), 3–43 (1986)

    Google Scholar 

  • Jensen, M.: The modern industrial revolution, exit, and the failure of internal control systems. J. Finance 48(3), 831–881 (1993)

    Article  Google Scholar 

  • Jensen, M., Meckling, W.: Theory of the firm: Managerial behavior, agency costs and ownership structure. J. Financ. Econ. 3(4), 305–360 (1976)

    Article  Google Scholar 

  • John, T.A.: Accounting measures of corporate liquidity, leverage, and costs of financial distress. Financ. Manag. 22(3), 91–100 (1993)

    Article  Google Scholar 

  • Kalcheva, I., Lins, K.V.: International evidence on cash holdings and expected managerial agency problems. Working Paper (2006)

  • Kester, C.W.: Capital and ownership structure: A comparison of united states and Japanese manufacturing corporations. Financ. Manag. 15(1), 5–16 (1986)

    Article  Google Scholar 

  • Keynes, J.M.: The General Theory of Employment Interest and Money. Macmillan, London (1936)

    Google Scholar 

  • Kim, C., Mauer, D.C., Sherman, A.E.: The determinants of corporate liquidity: Theory and evidence. J. Financ. Quant. Anal. 33(3), 335–358 (1998)

    Article  Google Scholar 

  • Kusnadi, Y.: Corporate governance mechanisms and corporate cash holdings. Working Paper (2004)

  • Kytönen, E.: Corporate liquidity holdings: An empirical investigation of Finnish firms. Working Paper (2005)

  • Lee, I., Lochhead, S., Ritter, J., Zhao, Q.: The cost of raising capital. J. Financ. Res. 19(1), 59–74 (1996)

    Google Scholar 

  • Lipton, M., Lorsch, J.W.: A Modest proposal for improved corporate governance. Bus. Lawyer 48(1), 59–77 (1992)

    Google Scholar 

  • Masulis, R.W., Trueman, B.: Corporate investment and dividend decisions under differential personal taxation. J. Financ. Quant. Anal. 23(4), 369–385 (1988)

    Article  Google Scholar 

  • Merton, R.: On the pricing of corporate debt: The risk structure of interest rates. J. Finance 29(2), 449–470 (1974)

    Article  Google Scholar 

  • Mikkelson, W.H., Partch, M.M.: Do persistent large cash reserves hinder performance? J. Financ. Quant. Anal. 38(2), 275–294 (2003)

    Google Scholar 

  • Myers, S.: Determinants of corporate borrowing. J. Financ. Econ. 5(2), 147–175 (1977)

    Article  Google Scholar 

  • Myers, S.: The capital structure puzzle. J. Finance 39(3), 575–592 (1984)

    Article  Google Scholar 

  • Myers, S., Majluf, N.: Corporate financing and investment decisions when firms have information that investors do not have. J. Financ. Econ. 13(2), 187–221 (1984)

    Article  Google Scholar 

  • Opler, T., Pinkowitz, L., Stulz, R., Williamson, R.: The determinants and implications of corporate cash holdings. J. Financ. Econ. 52(1), 3–46 (1999)

    Article  Google Scholar 

  • Ozkan, A., Ozkan, N.: Corporate cash holdings: An empirical investigation of UK companies. J. Bank. Finance 28(9), 2103–2134 (2004)

    Article  Google Scholar 

  • Papaioannou, G.J., Strock, E., Travlos, N.G.: Ownership structure and corporate liquidity policy. Manag. Decis. Econ. 13(4), 315–322 (1992)

    Article  Google Scholar 

  • Parrino, R., Weisbach, M.S.: Measuring investment distortions arising from stockholder-bondholder conflicts. J. Financ. Econ. 53(1), 3–42 (1999)

    Article  Google Scholar 

  • Pinkowitz, L., Williamson, R.: Bank power and cash holdings: Evidence from Japan. Rev. Financ. Stud. 14(4), 1059–1082 (2001)

    Article  Google Scholar 

  • Rajan, R.G., Zingales, L.: What do we know about capital structure? Some evidence from international data. J. Finance 50(5), 1421–1460 (1995)

    Article  Google Scholar 

  • Shleifer, A., Vishny, R.: Large shareholders and corporate control. J. Political Econ. 94(3), 461–488 (1986)

    Article  Google Scholar 

  • Shleifer, A., Vishny, R.: Liquidation values and debt capacity: A market equilibrium approach. J. Finance 47(4), 1343–1366 (1992)

    Article  Google Scholar 

  • Stiglitz, J.E.: Credit markets and the control of capital. J. Money, Credit Bank. 17(2), 133–152 (1985)

    Article  Google Scholar 

  • Stacescu, B.: Dividend policy in Switzerland. Financ. Mark. Portf. Manag. 20(2), 153–183 (2006)

    Article  Google Scholar 

  • Stulz, R.M.: Managerial control of voting rights: Financing policies and the market for corporate control. J. Financ. Econ. 20(1), 25–54 (1988)

    Article  Google Scholar 

  • Titman, S.: The effect of capital structure on a firm’s liquidation decision. J. Financ. Econ. 13(1), 137–151 (1984)

    Article  Google Scholar 

  • Titman, S., Wessels, R.: The determinants of capital structure choice. J. Finance 43(1), 1–19 (1988)

    Article  Google Scholar 

  • White, H.: A heteroscedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity. Econometrica 48(4), 817–838 (1980)

    Article  Google Scholar 

  • Whited, T.: Debt, liquidity constraints and corporate investment: Evidence from panel data. J. Finance 47(4), 1425–1460 (1992)

    Article  Google Scholar 

  • Williamson, O.: Corporate finance and corporate governance. J. Finance 43(3), 567–591 (1988)

    Article  Google Scholar 

  • Windmeijer, F.: A finite sample correction for the variance of linear efficient two-step GMM estimators. J. Econ. 126(1), 25–51 (2005)

    Google Scholar 

  • Yermack, D.: Higher market valuation of companies with a small board of directors. J. Financ. Econ. 40(2), 185–211 (1996)

    Article  Google Scholar 

  • Yermack, D.: Board members and company value. Financ. Mark. Portf. Manag. 20(1), 33–47 (2006)

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Institute of Finance, University of Hamburg, Von-Melle-Park 5, 20146, Hamburg, Germany

    Wolfgang Drobetz

  2. Department of Corporate Finance, University of Basel, Petersgraben 51, 4003, Basel, Switzerland

    Matthias C. Grüninger

Authors
  1. Wolfgang Drobetz
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Matthias C. Grüninger
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Wolfgang Drobetz.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Drobetz, W., Grüninger, M.C. Corporate cash holdings: Evidence from Switzerland. Fin Mkts Portfolio Mgmt 21, 293–324 (2007). https://doi.org/10.1007/s11408-007-0052-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11408-007-0052-8

Keywords

JEL

Search

Navigation