Determinants of Cash Holding for Us Firms
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
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