› › Investment And Financial Policies Of Industrially And Internationally Diversified Firms Cash Holdings The Value Of Cash Holdings And Financial Constraints

Investment and Financial Policies of Industrially and Internationally Diversified Firms---cash Holdings, the Value of Cash Holdings, and Financial Constraints

Author : Mussie Teclezion

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Page : 106 pages

File Size : 12,64 MB

Release : 2008

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The value impact of the two diversification strategies, namely, international and industrial diversification strategies, is one of the vastly-researched areas in the financial economics literature. In this paper, we add to diversification literature by examining the impact of each diversification strategy on the liquidity level firms choose to hold, on the propensity of firms to save cash out of their cash flow, on the tendency of firms to over-invest their free cash flow as well as on the value investors ascribe to the marginal cash within a firm. In the first essay, using fixed effect model as well as dynamic panel data model of Blundell and Bond (1998) type system GMM, we test the hypothesis that the two diversification strategies have no impact on the level of liquidity firm hold. In sample that spans from Q1Y1999 to Q4Y2005 and a sample size of 52,262 firm quarters for the fixed effect model and 20,544 firm quarters for the dynamic panel data model, we do not find any evidence that international diversification affects the liquidity level of firms. Nor do the location specific factors of the subsidiaries of internationally diversified firms, as measured by the Economic Freedom Index, have any effect on the level of cash holdings of firms. On the other hand, we find weak evidence that industrial diversification reduces the level of liquidity of firms. In the second essay, we examine the impact of the two diversification strategies on the propensity of firms to save cash out of their cash flow using a two-step GMM Instrumental Variable Regression model using a sample that extends from Q1Y1999 to Q4Y2005 and a sample size of 79,040 firm quarters. Industrial diversification reduces the propensity of firms to save cash out of their cash flow, while international diversification does not. We also examine the impact of the two diversification strategies on the overinvestment of free cash flow. In a sample of 74,914 firm quarters for the sample period of Q1Y1999 to Q4Y2005, we find evidence that industrial diversification increases the tendency of firms to over-invest their free cash flow. The third essay looks at whether the two diversification strategies have any impact on the value investors assign to the marginal dollar within a firm. Using a sample of 73,105 firm quarters for the sample period Q1Y1999 to Q4Y2005, we find evidence that while international diversification affects the value investors ascribe to the marginal dollar within the firm positively, industrial diversification affects it negatively. We also find that investors value the marginal dollar within single-segment internationally diversified as the highest and the marginal dollar within multi-segment domestic firms as the lowest within the four diversification groups.



Financial Constraints, Investment, and the Value of Cash Holdings

Author : David J. Denis

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Page : 38 pages

File Size : 18,59 MB

Release : 2007

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We provide robust evidence that cash holdings are more valuable for financially constrained firms than for unconstrained firms and investigate why this is so. Our results indicate that greater cash holdings are associated with higher levels of investment for both constrained and unconstrained firms, but that the marginal value of investment is greater for constrained firms. These findings suggest that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. As such, the evidence is consistent with the hypothesis that greater cash holdings of constrained firms are a value-increasing response to costly external financing.







formal versus informal finance: evidence from china

Author : Vojislav Maksimovic

Publisher : World Bank Publications

Page : 77 pages

File Size : 36,90 MB

Release : 2008

Category : Access to Finance

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Abstract: China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.



Systemic Banking Crises

Author : Luc Laeven

Publisher : International Monetary Fund

Page : 80 pages

File Size : 43,12 MB

Release : 2008-09

Category : Business & Economics

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We provide new firm-level evidence on the effects of capital account liberalization. Based on corporate foreign-currency credit ratings data and a novel capital account restrictions index, we find that capital controls can substantially limit access to, and raise the cost of, foreign currency debt, especially for firms without foreign currency revenues. As an identification strategy, we exploit, via a difference-in-difference approach, within-country variation in firms' access to foreign currency, measured by whether or not a firm belongs to the nontradables sector. Nontradables firms benefit substantially more from capital account liberalization than others, a finding that is robust to a broad range of alternative specifications.



Firm Diversification and the Value of Corporate Cash Holdings

Author : Zhenxu Tong

Publisher :

Page : 36 pages

File Size : 43,26 MB

Release : 2008

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This paper studies how firm diversification affects the value of corporate cash holdings. We develop four hypotheses based on efficient internal capital market, agency problems, coinsurance effect, and shareholder-bondholder conflicts. We find that the value of cash holdings is lower in diversified firms than single-segment firms. We find that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms, and that the value of cash is even lower for the diversified firms with more restrictions on shareholder rights. The findings are most consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems.



Determinants and Marginal Value of Corporate Cash Holdings

Author : Wenchien Liu

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Page : 14 pages

File Size : 18,86 MB

Release : 2018

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Previous studies indicate that financial constraints and corporate governance are main factors affecting corporate cash holdings. This paper simultaneously examines the interactive influences of financial constraints and corporate governance on corporate cash holdings among publicly traded U.S. firms. We find that firms with good governance hold more cash than do firms with poor governance, regardless of financial constraints. Furthermore, the cash holdings of financially constrained firms with good corporate governance are the highest among all firm types in this study. The impact of corporate governance on firm value is statistically strong only among firms with financial constraints. Our results indicate that financial constraints are a more crucial determinant of corporate cash holdings than is corporate governance. These findings have implications that firms with financial constraints should pay more attention to keep optimal liquidity, especially avoiding the unnecessary waste due to agency problems.



Financial Constraints, Corporate Governance and the Value of Cash

Author : Marcelo Ermel

Publisher :

Page : 19 pages

File Size : 46,50 MB

Release : 2019

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Due to market frictions, likelihood of using cash and corporate governance, a further R$ 1.00 in the company's cash may be worth more or less than R$ 1.00 for shareholders. In Brazil, there is an environment of lack of long-term external financing, high interest rates, non-dividend taxation and high shareholder concentration. All these characteristics are important for the shareholders to evaluate the use of the marginal cash. Thus, the present study identified no difference between the assessment of the marginal cash value for restricted and non-restricted firms, possibly due to high interest rates and a lack of long-term external financing. Regarding the issue of good use of cash, the increase of R$ 1.00 in the cash holdings of firms with better governance is worth R$ 1.29 for the shareholder, while for firms with worse governance it is only R$ 0.79. Additionally, investors in Brazil does not seem to evaluate persistent excess cash different than non persistent.



Corporate Financial Policy and the Value of Cash

Author : Michael W. Faulkender

Publisher :

Page : 38 pages

File Size : 23,87 MB

Release : 2013

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We examine the cross-sectional variation in the marginal value of corporate cash holdings arising from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon whether that dollar will most likely go to i) increasing distributions to equity, ii) reducing the amount of cash that needs to be raised in the capital markets, or iii) servicing debt or other liabilities. We then relate firm financial structure characteristics to the likelihood of firms engaging in these actions, and derive a set of intuitive hypotheses to test empirically. We generate estimates of the marginal value of cash by examining the variation in excess stock returns over the fiscal year and find results that are both qualitatively and quantitatively consistent with all hypotheses tested. In particular, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose to distribute cash via dividends rather than repurchases.