IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v41y2016icp410-425.html
   My bibliography  Save this article

Cash holding and control-oriented finance

Author

Listed:
  • Anderson, Ronald W.
  • Hamadi, Malika

Abstract

We critically reassess the notion that high liquid asset holding by firms faced with weak investor protection is evidence of managerial rent extraction. We show that firms facing agency problems may establish tight controls over management through concentrated ownership. Using data on Belgian listed firms between 1991 and 2006, we find a strong positive association between ownership concentration and cash holding. This indicates a precautionary motive on the part of the controlling shareholders who highly value control. We also find that firm market valuation is positively affected by the amount of cash held by firms. On the other hand, managerial ownership has no impact. These results are consistent with the hypothesis that firms' owners are pursuing a rational strategy to mitigate agency costs in the face of weak investor protections.

Suggested Citation

  • Anderson, Ronald W. & Hamadi, Malika, 2016. "Cash holding and control-oriented finance," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 410-425.
    • Handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:410-425
    DOI: 10.1016/j.jcorpfin.2016.10.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119916301705
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2016.10.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2003. "International Corporate Governance and Corporate Cash Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 111-133, March.
    2. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    3. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
    5. Kusnadi, Yuanto & Wei, K.C. John, 2011. "The determinants of corporate cash management policies: Evidence from around the world," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 725-740, June.
    6. Marco Becht & Colin Mayer, 2002. "Corporate control in Europe," Revue d'économie politique, Dalloz, vol. 112(4), pages 471-498.
    7. Martin Holmen & John D. Knopf & Stefan Peterson, 2007. "Trading‐off Corporate Control and Personal Diversification through Capital Structure and Merger Activity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(9‐10), pages 1470-1495, November.
    8. Boris Nikolov & Toni M. Whited, 2014. "Agency Conflicts and Cash: Estimates from a Dynamic Model," Journal of Finance, American Finance Association, vol. 69(5), pages 1883-1921, October.
    9. Mueller, Elisabeth, 2008. "How does owners' exposure to idiosyncratic risk influence the capital structure of private companies?," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 185-198, March.
    10. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox of Liquidity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 733-771.
    11. Mara Faccio & Maria-Teresa Marchica & Roberto Mura, 2011. "Large Shareholder Diversification and Corporate Risk-Taking," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3601-3641.
    12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    13. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    14. Ivalina Kalcheva & Karl V. Lins, 2007. "International Evidence on Cash Holdings and Expected Managerial Agency Problems," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1087-1112.
    15. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    16. Barca, Fabrizio & Becht, Marco (ed.), 2001. "The Control of Corporate Europe," OUP Catalogue, Oxford University Press, number 9780199247424.
    17. Han, Seungjin & Qiu, Jiaping, 2007. "Corporate precautionary cash holdings," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 43-57, March.
    18. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    19. David Sraer & David Thesmar, 2007. "Performance and Behavior of Family Firms: Evidence from the French Stock Market," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 709-751, June.
    20. Becht, Marco & Roell, Ailsa, 1999. "Blockholdings in Europe:: An international comparison1," European Economic Review, Elsevier, vol. 43(4-6), pages 1049-1056, April.
    21. Marco Becht & Fabrizio Barca, 2001. "The control of corporate Europe," ULB Institutional Repository 2013/13302, ULB -- Universite Libre de Bruxelles.
    22. Mikkelson, Wayne H. & Partch, M. Megan, 2003. "Do Persistent Large Cash Reserves Hinder Performance?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(2), pages 275-294, June.
    23. Julian Franks & Colin Mayer & Paolo Volpin & Hannes F. Wagner, 2012. "The Life Cycle of Family Ownership: International Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1675-1712.
    24. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    25. Jeffrey Zwiebel, 1995. "Block Investment and Partial Benefits of Corporate Control," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(2), pages 161-185.
    26. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
    27. Liu, Yixin & Mauer, David C. & Zhang, Yilei, 2014. "Firm cash holdings and CEO inside debt," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 83-100.
    28. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    29. Lee Pinkowitz & René Stulz & Rohan Williamson, 2006. "Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross‐country Analysis," Journal of Finance, American Finance Association, vol. 61(6), pages 2725-2751, December.
    30. Ronald W. Anderson & Andrew Carverhill, 2012. "Corporate Liquidity and Capital Structure," The Review of Financial Studies, Society for Financial Studies, vol. 25(3), pages 797-837.
    31. Iskandar-Datta, Mai E. & Jia, Yonghong, 2012. "Cross-country analysis of secular cash trends," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 898-912.
    32. Fritz Foley, C. & Hartzell, Jay C. & Titman, Sheridan & Twite, Garry, 2007. "Why do firms hold so much cash? A tax-based explanation," Journal of Financial Economics, Elsevier, vol. 86(3), pages 579-607, December.
    33. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 335-359, September.
    34. Marco Becht & Ailsa Roell, 1999. "Blockholdings in Europe: an international comparison," ULB Institutional Repository 2013/13316, ULB -- Universite Libre de Bruxelles.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bijoy Chandra Das & Fakhrul Hasan & Soma Rani Sutradhar, 2024. "The impact of economic policy uncertainty and inflation risk on corporate cash holdings," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 865-887, April.
    2. Tan, Jianhua & Wang, Xiongyuan & Chan, Kam C., 2020. "Does a national reform of a logistics system matter in corporate cash management? Evidence from logistics service standardization in China," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    3. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.
    4. Chang, Chong-Chuo & Yang, Han, 2022. "The role of cash holdings during financial crises," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    5. Chada, Swechha & Saravanan, Palanisamy & Varadharajan, Gopal, 2024. "Socioemotional wealth and cash flow sensitivity of cash: Evidence from India," The North American Journal of Economics and Finance, Elsevier, vol. 69(PA).
    6. Zhang, Xiang & Zhang, Zongyi & Zhou, Han, 2020. "Oil price uncertainty and cash holdings: Evidence from China," Energy Economics, Elsevier, vol. 87(C).
    7. Li, Xiafei & Luo, Di, 2020. "Increase in cash holdings of U.S. firms: The role of healthcare and technology industries," Journal of Business Research, Elsevier, vol. 118(C), pages 286-298.
    8. Xiaohong Xian & Xiang Zhang & Zongyi Zhang & Stavros Sindakis & Sakshi Aggarwal, 2024. "Examining the Impact of Idiosyncratic Risk on Corporate Cash Holdings: Evidence from China," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 5151-5173, June.
    9. Mahmoud Otaify & Aly Dawood & Mohamed Farouk, 2022. "Optimal Cash Ratio and Adjustment Speed Across Different Firm Characteristics," International Journal of Economics and Financial Issues, Econjournals, vol. 12(3), pages 73-85, May.
    10. Xiang Zhang & Zongyi Zhang & Han Zhou, 2023. "Grabbing hand or financial constraint mitigation effect? A reexamination of the relationship between institutional development and cash holdings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(1), pages 631-655, March.
    11. Wang, Di & Guo, Liangju & Xing, Saipeng, 2024. "Compulsory liability insurance and excess cash holdings: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    12. Xiaohong Xian & Xiang Zhang & Zongyi Zhang & Stavros Sindakis & Sakshi Aggarwal, 2024. "Cash Holdings Trends Influenced by Market Competitiveness: Evidence from the Chinese Stock Market," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8767-8796, June.
    13. Edward Jones & Hao Li & Oluwagbenga Adamolekun, 2022. "Excess Cash Holdings, Stock Returns, and Investment Organicity: Evidence from UK Investment Announcements," Abacus, Accounting Foundation, University of Sydney, vol. 58(4), pages 603-647, December.
    14. Herdhayinta, Heyvon & Lau, James & Shen, Carl Hsin-han, 2023. "Cash holdings of minority family businesses in Indonesia," Emerging Markets Review, Elsevier, vol. 55(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Anderson, Ronald W. & Hamadi, Malika, 2016. "Cash holding and control-oriented finance," LSE Research Online Documents on Economics 68339, London School of Economics and Political Science, LSE Library.
    2. Malika Hamadi & Ronald W. Anderson, 2009. "Large powerful shareholders and cash holding," LSF Research Working Paper Series 09-04, Luxembourg School of Finance, University of Luxembourg.
    3. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    4. Jan Felix Weidemann, 2018. "A state-of-the-art review of corporate cash holding research," Journal of Business Economics, Springer, vol. 88(6), pages 765-797, August.
    5. Hou, Canran & Liu, Huan, 2020. "Foreign residency rights and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 64(C).
    6. Pascal Nguyen & Nahid Rahman, 2020. "Institutional ownership, cross‐shareholdings and corporate cash reserves in Japan," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1175-1207, April.
    7. Gupta, C.P. & Bedi, Prateek, 2020. "Corporate cash holdings and promoter ownership," Emerging Markets Review, Elsevier, vol. 44(C).
    8. Paulo, Alves, 2018. "Abnormal retained earnings around the world," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 63-74.
    9. Maurizio Rocca & Raffaele Staglianò & Tiziana Rocca & Alfio Cariola & Ekaterina Skatova, 2019. "Cash holdings and SME performance in Europe: the role of firm-specific and macroeconomic moderators," Small Business Economics, Springer, vol. 53(4), pages 1051-1078, December.
    10. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    11. Hsuan-Chu Lin & She-Chih Chiu, 2017. "Tradeoff on corporate cash holdings: a theoretical and empirical analysis," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 727-763, October.
    12. Megginson, William L. & Ullah, Barkat & Wei, Zuobao, 2014. "State ownership, soft-budget constraints, and cash holdings: Evidence from China’s privatized firms," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 276-291.
    13. Javadi, Siamak & Mollagholamali, Mohsen & Nejadmalayeri, Ali & Al-Thaqeb, Saud, 2021. "Corporate cash holdings, agency problems, and economic policy uncertainty," International Review of Financial Analysis, Elsevier, vol. 77(C).
    14. Anderson, Ronald & Hamadi, Malika, 2009. "Large powerful shareholders and cash holding," CEPR Discussion Papers 7291, C.E.P.R. Discussion Papers.
    15. repec:dau:papers:123456789/2938 is not listed on IDEAS
    16. Anderson, Ronald W. & Hamadi, Malika, 2009. "Large powerful shareholders and cash holding," LSE Research Online Documents on Economics 24422, London School of Economics and Political Science, LSE Library.
    17. Schmid, Thomas & Ampenberger, Markus & Kaserer, Christoph & Achleitner, Ann-Kristin, 2010. "Controlling shareholders and payout policy: do founding families have a special 'taste for dividends'?," CEFS Working Paper Series 2010-01, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    18. Adão, Bernardino & Silva, André C., 2020. "The effect of firm cash holdings on monetary policy," European Economic Review, Elsevier, vol. 128(C).
    19. Cui, Di & Ding, Mingfa & Han, Yikai & Suardi, Sandy, 2022. "Foreign shareholders, relative foreign policy uncertainty and corporate cash holdings," International Review of Financial Analysis, Elsevier, vol. 84(C).
    20. Mohamed Arouri & Guillaume Pijourlet, 2017. "CSR Performance and the Value of Cash Holdings: International Evidence," Journal of Business Ethics, Springer, vol. 140(2), pages 263-284, January.
    21. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.

    More about this item

    Keywords

    Cash holding; Ownership concentration; Investor protection; Control-oriented finance; Family firms;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:410-425. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.