Cash Holdings Are Increasing and Financial Crisis Strengths It

37 Pages Posted: 8 Jan 2018

See all articles by Paulo F. Pereira Alves

Paulo F. Pereira Alves

CMVM - Portuguese Securities and Exchange Commission, ISCAL and Lusofona University

Francisco Morais

ISCAL

Date Written: January 4, 2018

Abstract

The goal of this paper is to study the determinants of firms’ cash holdings and how cash holdings were affected by the financial crisis of 2008. Using data from the period of 1995 to 2014 of non-financial firms, we present almost 265,000 firm-year observations. Our results suggest that cash holdings have a positive relationship with investment set and a negative relationship with liquidity and firm size. Our results also show that cash holdings are influenced by capital market development and banking sector, as well as by inflation. Agency theory determinants demonstrate that firms in common law countries and countries with higher law enforcement still hold higher amounts of cash holdings. Cash holdings post-crisis are higher than pre-crisis and there is a spike in cash holdings during 2009. Our hypothesis for these results are explained by the precautionary motive.

Keywords: Free Cash Flow Theory, Pecking Order Theory; Trade-Off Theory; Precautionary Motive; Financial Crisis

Suggested Citation

Pereira Alves, Paulo F. and Morais, Francisco, Cash Holdings Are Increasing and Financial Crisis Strengths It (January 4, 2018). Available at SSRN: https://ssrn.com/abstract=3096566 or http://dx.doi.org/10.2139/ssrn.3096566

Paulo F. Pereira Alves (Contact Author)

CMVM - Portuguese Securities and Exchange Commission, ISCAL and Lusofona University ( email )

Rua Laura Alves n.º 4 Apartado 14258
Lisbon
Portugal

Francisco Morais

ISCAL ( email )

Portugal

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