THE DETERMINANTS OF CORPORATE CASH HOLDINGS: DOES COUNTRY’S LEGAL REGIME MATTER? EVIDENCE FROM BRIC AND TURKEY

Year 2019, Volume: 6 Issue: 4, 192 - 205, 30.12.2019

Guler Aras Ozlem Kutlu Furtuna , Nuray Tezcan

Abstract

Purpose - This study aims to fill the gap for BRIC countries and Turkey by looking into the determinants of cash holding across different firm sizes and industries with a perspective on country’s legal regime.
Methodology- The sample contains 5.840 firm-year observations across these countries for the period 2005–2014. Capital expenditure, growth opportunities, liquid asset substitutions, leverage, profitability, firm size and GDP per capita- as a measure of the economic development- have been taken to explore the determinants of corporate cash holdings. In order to see whether country’s legal regime matter; the shareholder protection has also been discussed as a determinant of corporate cash holding. Several models have been implemented for each of the cash holding measures, and all of them are estimated by panel data regressions with fixed effects.
Findings- The results gave strong evidence that potential investment and growth opportunities, liquid asset substitution and firm size significantly affect the cash holdings decisions of non-financial firms and that are in conformity with the existing literature on the determinants of corporate cash holdings. Besides this, findings provide support for the notion that related firms is under financial constraint and tend to hold more cash as a result of the precautionary motive for cash.
Conclusion- These multicounty results, together with the view of common and civil-law differentiation, suggest that country characteristics strongly influence the determinants of cash holding. Countries which have poor corporate governance hold cash at higher levels compared to countries that have good corporate governance.

Keywords

Corporate cash holding, liquidity, financial constraint, corporate governance, BRIC, Turkey, panel data

References

• Acharya, V., Amihud, Y., Litov, L. (2011). Creditor rights and corporate risk-taking, Journal of Financial Economics, 102, 150–166
• Afza, T., Adnan, S.M. (2007). Determinants of corporate cash holdings: A Case study of Pakistan. Proceedings of Singapore Economic Review Conference, Organized by Singapore Economics Review and The University of Manchester (Brooks World Poverty Institute), 164-165.
• Al-Najjar, B., Y. Belghitar. (2011). Corporate cash holdings and dividend payments: Evidence from simultaneous analysis, Managerial and Decision Economics, Vol. 32, No. 4, pp. 231-241.
• Al-Najjar, B. (2013). The financial determinants of corporate cash holdings: Evidence from some emerging markets, International Business Review, Vol. 22, No.1, pp. 77-88.
• Ali, A., Yousaf, S. (2013). Determinants of cash holding in German Market, Journal of Business and Management, ISSN: 2278-487X, p-ISSN: 2319-7668, Vol. 12, Issue 6, pp. 28- 34
• Almeida, H., Campello M., Weisbach M.S. (2004). The cash flow sensitivity of cash, The Journal of Finance, 59, pp.1777-1804.
• Ameer (2014). Financial constraints and corporate investment in Asian countries, Journal of Asian Economics, 33, pp.44-55.
• Amess, K., Banerji, S., Lampousis, A. (2015). Corporate cash holdings: Causes and consequences, International Review of Financial Analysis, p.13
• Anagnostopoulou, S. (2013). Cash holdings: Determining factors and impact on future operating performance for listed versus unlisted Firms, Review of Pacific Basin Financial Markets and Policies, Vol. 16, No. 2
• Anjum, S., Q.A. Malik. (2013). Determinants of corporate liquidity – An analysis of cash holdings, Journal of Business and Management, Vol.7, No. 2, pp. 94-100.
• Attig, N., El Ghoul, S. Guedhami, O. and Riseanu, S. (2013). The governance role of multiple large shareholders: Evidence on the valuation of cash holdings. Journal of Management and Governance, 17 (2) 419–451.
• Aras, G. (2015). The effect of corporate governance practices on financial structure in emerging markets: Evidence from BRICK countries and lessons for Turkey, Emerging Markets Finance and Trade, 51, sup.2, pp.5-24.
• Baumol, W. J. (1952). The transactions demand for cash: An inventory theoretic approach, Quarterly Journal of Economics, Vol. 66, 545-556.
• Bates, T., Kahle K., Stulz R. (2009). Why Do U.S. Companies hold so much more cash than they used to? Journal of Finance, Vol. 64, No. 5, pp. 1985-2021.
• Belkhir, M. Boubaker S. Derouiche I. (2014). Control–ownership wedge, board of directors, and the value of excess cash, Economic Modelling, 39(C), 110–122.
• Berger, P., Ofek, E. (1995). Diversification's effect on firm value. Journal of Financial Economics, 37, 39–65.
• Borhanuddin, R. Ching P. (2011). Cash Holdings, leverage, ownership concentration and board independence: Evidence from Malaysia, Malaysian Accounting Review, Vol. 10 No. 1, 63-88, 2011.
• Brisker, E.R. Çolak, G. Peterson, D.R. (2013). Changes in cash holdings around the S&P 500 additions, Journal of Banking & Finance, 37, pp. 1787-1807.
• Cetenak, E.H., Vural, G. (2015). Business group affiliation and financial constraints: Investment-cash flow sensitivity of Turkish business groups, Journal of Economics, Finance and Accounting (JEFA), Vol.2, Issue 3, ISSN: 2148-6697, pp.313-330.
• Chen, Y. R. (2008). Corporate governance and cash holdings: Listed new economy versus old economy firms, Corporate Governance, Vol.16, No.5, pp.430-442
• Chen, S.S. Chou, R.K. Chou S. (2009). The impact of investment opportunities and free cash flow on financial liberalization: A cross-firm analysis of emerging economies, Financial Management, pp.543-566
• Chen, Q., Chen X., Schipper K., Yongxin X. (2012). The Sensitivity of Corporate Cash Holdings to Corporate Governance, Working paper series
• Chen, D., Li, S., Xiao, J.Z., Zou, H. (2014). The effect of government quality on corporate cash holdings. Journal of Corporate Finance, 27, pp.384-400.
• Chen, X. Sun, Y. Xu, X., (2015a). Free cash flow, over-investment and corporate governance in China, Pacific-Basin Finance Journal, doi: 10.1016/j.pacfin.2015.06.003
• Chen Y, Dou P.Y. Ghon R. Truong C, Veeraraghavan M. (2015b). National culture and corporate cash holdings around the World, Journal of Banking & Finance, 50, pp. 1–18.
• Daher, M. (2010). The Determinants of Cash Holdings in UK Public and Private Companies, (Thesis), Lancaster University Management School.
• Dittmar, A., J. Mahrt-Smith, Servaes H. (2003). International corporate governance and corporate cash holdings”, Journal of Financial and Quantitative Analysis, Vol.38, No. 1, pp. 111-133.
• Egimbaeva, B. (2013). Corporate Investment and Cash Flow Sensitivity: Evidence from Turkey, Dokuz Eylul University, Master Thesis.
• Ferreira, A., Vilela S. (2004). Why do companies hold cash? Evidence from EMU countries, European Financial Management, Vol. 10, No. 2, pp. 295-319
• Francis, B., Iftekhar H., Liang S., Maya W. (2013). Corporate governance and investment-cash flow sensitivity: Evidence from emerging markets, Emerging Markets Review, Elsevier, vol. 15(C), pp. 57-71.
• Gill, A., Shah, C. (2012). Determinants of corporate cash holdings: Evidence from Canada, International Journal of Economics and Finance, Vol.4, No.1, pp.70-79.
• Guney, Y., Ozkan, A., Ozkan, N. (2003). “Additional International Evidence on Corporate Cash Holding”. EFMA Helsinki meetings
• Guney, Y., Ozkan, A., Ozkan, N. (2006). International Evidence on the non-linear impact of leverage on corporate cash holdings, Journal of Multinational Financial Management, 17(1):45-60
• Hall, T. Mateus, C. Mateus, I. (2014). What determines cash holdings at privately held and publicly traded firms? Evidence from 20 emerging markets, International Review of Financial Analysis, 33, 104–116.
• Harford, J. (1999). “Corporate Cash Reserves and Acquisitions” Journal of Finance, Vol.54, pp. 1969-1997
• Jensen, M. and Meckling, W. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics, Vol.3, Issue 4, pp. 305-360.
• Jensen, M. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review, 76, 2, pp. 323-329.
• Kim, C., D.C. Mauer, A.E. Sherman. (1998). The Determinants of Corporate Liquidity: Theory and Evidence, Journal of Financial and Quantitative Analysis, Vol.33, 335-359.
• Koshio, S., Sales Cia, J.N. de. (2003). The Determinants of Corporate Cash Holdings in Brazil, (Working Paper), EAESP.
• Kraus, A., R.H. Litzenberger. (1973). A State-Preference Model of Optimal Financial Leverage, The Journal of Finance, Vol.28, pp. 911-922.
• Kuan, T. Li, C. Chu, S. (2011). Cash holdings and corporate governance in family-controlled firms, Journal of Business Research. Vol.64, pp. 757-764.
• Kuan, T. Li, C. Liu, S. (2012). Corporate governance and cash holdings: A quantile regression approach, International Review of Economics and Finance, Vol. 24, pp.303–314.
• Kusnadi, Y. Wei, K.C. (2011). The determinants of corporate cash management policies: Evidence from around the World, Journal of Corporate Finance, 17, 725–740.
• La Porta, R. Lopez‐de‐Silanes, F. Shleifer A. Vishny R. (1998). Law and Finance, Journal of Political Economy, Vol. 106, No. 6. pp. 1113-1155.
• Lee, K.W., Lee, C.F. (2009). Cash Holdings, Corporate Governance Structure and Firm Valuation, Review of Pacific Basin Financial Markets and Policies, Vol. 12, No. 3. 475–508.
• Luo, M. (2011). A bright side of financial constraints in cash management, Journal of Corporate Finance, 17, pp. 1430–1444.
• Masood, A. Shah, A. (2014). Corporate governance and cash holdings in listed non-financial firms in Pakistan, Business Review, Vol.9, No.2, 48-73.
• Megginson, W.L., Wei, Z. (2010). Determinants and value of cash holdings: Evidence from China's privatized firms. SSRN Working Paper Series, 1-37.
• Miller, M.H., Orr, D. (1966). A Model of the Demand for Money by Companies, Quarterly Journal of Economics, Vol. 80, No.3, pp. 413-435.
• Myers, S.C., Majluf, N.S., (1984). Corporate financing and investment decisions when firm have information that investors do not have. Journal of Financial Economics, 13 (2), 187–221.
• Ogundipe L.O., S.E. Ogundipe, S.K. Ajao. (2012). Cash Holding and Company Characteristics: Evidence from Nigerian Emerging Market, Journal of Business, Economics and Finance, Vol. 1, No. 2 , pp. 45-58.
• Opler, T., Pinkowitz, L., Stulz, R. and Williamson, R. (1999). The determinants and implications of corporate cash holdings, Journal of Financial Economics, Vol. 52, pp.3–46
• Ozkan, A., Ozkan N. (2004). Corporate cash holdings: An empirical investigation of UK companies, Journal of Banking and Finance, Vol. 28 (9), pp. 2103-2134.
• Pinkowitz, L., Stulz, R., Williamson, R., (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A Cross-country analysis, Journal of Finance, 61, 2725–2751.
• Rajan, R.G. Zingales, L. (1995). What do we know about capital structure? Some evidence from international data, The Journal of Finance, Vol. 50, No. 5 pp. 1421-1460.
• Ramirez, A., Tadesse, S. (2009). Corporate cash holdings, uncertainty avoidance, and multinationality of firms, International Business Review, 18, 387–403.
• Rızwan, M.F. Javed, T. (2011). Determinants of corporate cash holdings: Evidence from Pakistani corporate sector, Economics, Management and Financial Markets, Volume 6(1), pp. 344–358,
• Subramaniam, V., Tang, T. T., Yue, H., Zhou, X. (2011). Firm structure and corporate cash holdings, Journal of Corporate Finance, Vol. 17(3), pp. 759-773
• Uyar, A., Kuzey, C. (2014). Determinants of corporate cash holdings: evidence from the emerging market of Turkey, Applied Economics, Vol. 46, No. 9, 1035–1048.
• Verduyn, S. (2013). An Empirical Analysis of the Determinants of Cash Holdings of Non-Financial Turkish Listed Companies, Dokuz Eylul University, Master Thesis.
• Wooldridge, J.M. (2002). Econometric Analysis of Cross Section and Panel Data, MIT Press, Cambridge.