Determinants of Cash Holding for Us Firms

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Determinants of CORPORATE Cash HoldingS During the Recent Crisis

b.sc. Thesis

2010-05-24

Lucas Kuijsters
722689

Abstract
In this thesis I investigate the development of determinants of corporate cash holdings during the recent crisis. I create two categories of firms; one with financially constraint and unconstraint firms classified on their size and one with financially constraint and unconstraint firms based on the de size of their dividend payments. Unconstraint firms do not manage their cash holdings in normal conditions, but when conditions deteriorated during the crisis also unconstraint firms had to decrease their cash holdings to absorb the negative macro economical shock. When perceived counterparty risk increased, the borrowing capacity of unconstraint firms increased, while the borrowing capacity of constrained firms decreased. Through regression analysis I find that the determinacy of cash holdings during the most severe periods of the crisis differences significantly from less severe periods of the crisis.

1. Introduction
In a Modigliniani-Miller world, there are no transaction costs, taxes do not exist and there are no information asymmetries. Why firms hold excess cash is an irrelevant question. However, the real world is dissimilar to the Modigliniani-Miller world and there are benefits and costs associated with cash holdings (Faulkender, 2006). Opler et al. (1999) examined the determinants of corporate holdings of cash and marketable securities among publicly traded US firms from 1971-1994. The paper concludes that firms with strong growth opportunities and firms with high-risk activities hold more cash. Firms with easy access to capital markets hold less cash. Direct consequences of the recent crises led to a significant amount of changes within the world economy. Access to external credit became difficult, investment opportunities were lost, risk measurements increased to unprecedented levels and firms were forced to use their excess cash holdings to absorb the large negative stock (Kahle & Stulz, 2011). A thorough analyzation of how the levels of cash holdings developed during different stages of the crisis has proved intriguing as it provides insight as to how firms actively manage their cash holdings. Furthermore, it has been interesting to examine exactly how these cash holdings are determined and if these determinants change during the crisis. My paper is strongly related to the Opler et al (1999) paper. I relate their model to the current financial crisis. In other words, I investigate how corporate cash holdings for U.S. firms are differently determined before and during the recent crisis. I also investigate how these determinants develop during the crisis period and I examine how these determinants differ between small and large firms and firms with high dividend and low dividend payments.

First, I divide firms in groups of constraint and unconstraint firms, based on the Size and their Dividend Payments. Then I investigate the development of the different determinants of cash holdings during different stages in the crisis. Finally I use regression analysis to investigate the determination of cash holdings and the development of the impact of these determinants on corporate cash holdings. To obtain data I use CompuStat. I only focus on U.S. firms, to obtain a sample of firms that is as homogeneous as possible. In my research, I find that constraint firms hold significantly more cash to net assets than unconstraint firms for both constraint-categories. Although one would expect unconstraint firm to not manage their cash holdings actively, I find evidence that unconstraint firms managed their cash holdings actively when conditions deteriorated. I also find evidence that when counterparty risk increased, the borrowing capacity of unconstraint firms based on size increased, while the borrowing capacity of constrained firms based on size decreased. I find evidence that...
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