Determinants of Corporate Cash Holdings
Determinants of Corporate Cash Holdings
C. Hobma, S. Labitzke, M. Munsterhuis, L. Zwols March 24, 2011
This paper examines what determinants explain corporate cash holdings of 1078 US rms listed on the New York Stock Exchange (NYSE) for the period January 1990 till December 2007. Using regression analysis with panel data we show that our ndings are in line with previous literature. Consistent with the trade o theory, we found a signi cant positive relationship between rms' investment opportunities and their cash holdings. Furthermore, we found that larger rms hold relatively more cash which is in line with the pecking order theory. A dividend dummy shows that dividends can be regarded as a substitute for cash holdings. Finally, we found evidence that technology rms, which are associated with more uncertainty, hold more cash than nontechnology rms.
1. Introduction
Corporate cash policy has become a topic of signi cant interest recently. The investigation of determinants of corporate cash holdings is an important research area contributing to the understanding of how much cash a rm will hold. The added value of this paper is that it gives a comprehensive discussion of which theories underlie corporate cash holdings. Next to that, it investigates rm speci c characteristics as well as industry characteristics that can in uence the level of corporate cash holdings based on a dataset of 1078 US rms listed on the NYSE for the period 1990 to 2007. This paper proceeds as follows. We rst examine the theoretical background concerning the determinants of corporate cash holdings. Theories that are discussed are the trade o theory, the pecking order theory and the free cash ow theory. Second, we discuss the research which already have been done concerning the relevant determinants. Investment opportunities, leverage, rm size, cash ows, dividends and industries will be discussed. In the third part, data and methodology will be discussed. Fourth, the
C. Hobma, S. Labitzke, M. Munsterhuis, L. Zwols March 24, 2011
This paper examines what determinants explain corporate cash holdings of 1078 US rms listed on the New York Stock Exchange (NYSE) for the period January 1990 till December 2007. Using regression analysis with panel data we show that our ndings are in line with previous literature. Consistent with the trade o theory, we found a signi cant positive relationship between rms' investment opportunities and their cash holdings. Furthermore, we found that larger rms hold relatively more cash which is in line with the pecking order theory. A dividend dummy shows that dividends can be regarded as a substitute for cash holdings. Finally, we found evidence that technology rms, which are associated with more uncertainty, hold more cash than nontechnology rms.
1. Introduction
Corporate cash policy has become a topic of signi cant interest recently. The investigation of determinants of corporate cash holdings is an important research area contributing to the understanding of how much cash a rm will hold. The added value of this paper is that it gives a comprehensive discussion of which theories underlie corporate cash holdings. Next to that, it investigates rm speci c characteristics as well as industry characteristics that can in uence the level of corporate cash holdings based on a dataset of 1078 US rms listed on the NYSE for the period 1990 to 2007. This paper proceeds as follows. We rst examine the theoretical background concerning the determinants of corporate cash holdings. Theories that are discussed are the trade o theory, the pecking order theory and the free cash ow theory. Second, we discuss the research which already have been done concerning the relevant determinants. Investment opportunities, leverage, rm size, cash ows, dividends and industries will be discussed. In the third part, data and methodology will be discussed. Fourth, the