Essays in cash holdings

Abstract

This thesis consists of three articles covering topics in corporate cash holdings. The first article proposes to map the current state of cash holdings through a systematic literature review that show links, core ideas, networks, methods, and findings that have built the research pathway for corporate cash holding strand. Basically, the saying once bitten, twice shy reflects how firms around the world have behaved over time regarding their cash--holding policy. We show that the upward trend on cash holdings remains across firms from both developed and developing countries. In a survey of 105 papers from 1997 to 2015, we identify papers published on cash-holding research that have used agency theory, trade-off theory, pecking order theory, and contemporary approaches to ground theoretical and empirical improvements to the cash holding literature. We then classified and coded each paper, and a research agenda and some recommendations that may advance the field are presented. The second article attempts to answer an unexplored issue related to insider ownership, cash holdings and idiosyncratic risk. Cash is considered the most liquid of a firm's assets enabling firms to finance growth opportunities, avoiding the high cost of raising external funds, and providing liquidity when firms need it the most. Although excess cash increases a firm's ability to reach corporate goals, it does not ensure that managers will commit to a corporate strategy that protects shareholders and other investors. To mitigate potential misbehaviour, insider ownership should be increased to align managers with shareholders' interests. However, if a significant proportion of manager's personal wealth is linked to compensation packages based on equity shares, managers will be exposed to idiosyncratic risk. We investigate the relationship among corporate cash holdings, insider ownership, and idiosyncratic risk. Using a sample of US firms from 1992 to 2014, we find that idiosyncratic risk drives firm cash policies, and insider ownership is negatively related to corporate cash holdings. We do not find that the level of insider ownership affects the cash--idiosyncratic risk relationship. The third article focuses on the real consequences on cash policy when firms face expected and unexpected shocks. In particular, it is explored how cash holdings and derivatives instruments interplay to manage corporate risk on exogenous shocks. We employ difference--in--differences methodology around two exogenous variations that produce expected and unexpected shocks on corn price volatilities in the American market. The paper provides evidence that the unexpected shock positively influences firms to holding cash. We further find that financially constrained firms also maintain higher cash balances than unconstrained firms after unexpected exogenous variation. The analysis also reveals that cash holdings and derivatives instruments perform a substitute role on firm's risk management policy. The findings suggest that firms that used derivatives are less sensitive to exogenous shocks than firms that did not use these financial hedging instruments.