IDEAS home Printed from https://ideas.repec.org/a/spr/jbecon/v92y2022i2d10.1007_s11573-021-01055-8.html
   My bibliography  Save this article

Why do corporate cash holdings differ within reunified Germany?

Author

Listed:
  • Alexander Kupfer

    (University of Innsbruck)

  • Julia Oberndorfer

    (University of Innsbruck)

  • Felix Kunz

    (University of Innsbruck)

Abstract

This study examines German firms’ managerial decision-making from the perspective of corporate cash holdings. An econometric analysis of 89,018 firm-year observations for 2004–2016 shows that East German firms hold significantly more cash than their West German counterparts. It is further demonstrated that no reasonable hypotheses (i.e. structural differences, access to financing, and historical differences) can explain East German firms’ higher cash holdings. Instead, the difference in cash holdings is only relevant for small- and medium-sized enterprises (SMEs). Additionally, East German SMEs adjust excess cash more slowly than West German SMEs. These findings are consistent with the hypothesis that cultural attributes influence managerial decision-making and imply that the norms and values of the former German Democratic Republic persist.

Suggested Citation

  • Alexander Kupfer & Julia Oberndorfer & Felix Kunz, 2022. "Why do corporate cash holdings differ within reunified Germany?," Journal of Business Economics, Springer, vol. 92(2), pages 197-232, February.
    • Handle: RePEc:spr:jbecon:v:92:y:2022:i:2:d:10.1007_s11573-021-01055-8
    DOI: 10.1007/s11573-021-01055-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11573-021-01055-8
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11573-021-01055-8?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. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    2. Gao, Huasheng & Harford, Jarrad & Li, Kai, 2013. "Determinants of corporate cash policy: Insights from private firms," Journal of Financial Economics, Elsevier, vol. 109(3), pages 623-639.
    3. Ramírez, Andrés & Tadesse, Solomon, 2009. "Corporate cash holdings, uncertainty avoidance, and the multinationality of firms," International Business Review, Elsevier, vol. 18(4), pages 387-403, August.
    4. 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.
    5. Heineck, Guido & Süssmuth, Bernd, 2013. "A different look at Lenin’s legacy: Social capital and risk taking in the Two Germanies," Journal of Comparative Economics, Elsevier, vol. 41(3), pages 789-803.
    6. Claudia Nadler & Wolfgang Breuer, 2019. "Cultural Finance as a research field: an evaluative survey," Journal of Business Economics, Springer, vol. 89(2), pages 191-220, March.
    7. 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.
    8. Michael Fritsch & Alexander S. Kritikos & Alina Sorgner, 2015. "Why did self-employment increase so strongly in Germany?," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 27(5-6), pages 307-333, June.
    9. Uhlig, Harald, 2008. "The slow decline of East Germany," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 517-541, December.
    10. Arena, Matteo P. & Dewally, Michaël, 2012. "Firm location and corporate debt," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1079-1092.
    11. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    12. Rainer, Helmut & Siedler, Thomas, 2009. "Does democracy foster trust?," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 251-269, June.
    13. Wu, Wenfeng & Rui, Oliver M. & Wu, Chongfeng, 2012. "Trade credit, cash holdings, and financial deepening: Evidence from a transitional economy," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2868-2883.
    14. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    15. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    16. Garcia-Appendini, Emilia & Montoriol-Garriga, Judit, 2013. "Firms as liquidity providers: Evidence from the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 109(1), pages 272-291.
    17. Fuchs-Schündeln, Nicola & Izem, Rima, 2012. "Explaining the low labor productivity in East Germany – A spatial analysis," Journal of Comparative Economics, Elsevier, vol. 40(1), pages 1-21.
    18. Leonardo Bursztyn & Davide Cantoni, 2016. "Tear in the Iron Curtain: The Impact of Western Television on Consumption Behavior," The Review of Economics and Statistics, MIT Press, vol. 98(1), pages 25-41, March.
    19. Garcia-Appendini, Emilia, 2018. "Financial distress and competitors' investment," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 182-209.
    20. Jiang, Zhan & Lie, Erik, 2016. "Cash holding adjustments and managerial entrenchment," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 190-205.
    21. Phan, Hieu V. & Nguyen, Nam H. & Nguyen, Hien T. & Hegde, Shantaram, 2019. "Policy uncertainty and firm cash holdings," Journal of Business Research, Elsevier, vol. 95(C), pages 71-82.
    22. Friehe, Tim & Mechtel, Mario, 2014. "Conspicuous consumption and political regimes: Evidence from East and West Germany," European Economic Review, Elsevier, vol. 67(C), pages 62-81.
    23. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    24. Alberto Alesina & Nicola Fuchs-Schundeln, 2005. "Good bye Lenin (or not?): The effect of Communism on people's preferences," Harvard Institute of Economic Research Working Papers 2076, Harvard - Institute of Economic Research.
    25. 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.
    26. Michael Fritsch & Elisabeth Bublitz & Alina Sorgner & Michael Wyrwich, 2014. "How much of a socialist legacy? The re-emergence of entrepreneurship in the East German transformation to a market economy," Small Business Economics, Springer, vol. 43(2), pages 427-446, August.
    27. Bedendo, Mascia & Garcia-Appendini, Emilia & Siming, Linus, 2020. "Cultural Preferences and Firm Financing Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(3), pages 897-930, May.
    28. Harald Uhlig, 2006. "Regional Labor Markets, Network Externalities and Migration: The Case of German Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 383-387, May.
    29. Rudiger Dornbusch & Holger C. Wolf, 1994. "East German Economic Reconstruction," NBER Chapters, in: The Transition in Eastern Europe, Volume 1, Country Studies, pages 155-190, National Bureau of Economic Research, Inc.
    30. Guido W. Imbens & Jeffrey M. Wooldridge, 2009. "Recent Developments in the Econometrics of Program Evaluation," Journal of Economic Literature, American Economic Association, vol. 47(1), pages 5-86, March.
    31. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    32. Chen, Yangyang & Dou, Paul Y. & Rhee, S. Ghon & Truong, Cameron & Veeraraghavan, Madhu, 2015. "National culture and corporate cash holdings around the world," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 1-18.
    33. Sumit Agarwal, 2010. "Distance and Private Information in Lending," The Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
    34. Saad, Gad & Cleveland, Mark & Ho, Louis, 2015. "Individualism–collectivism and the quantity versus quality dimensions of individual and group creative performance," Journal of Business Research, Elsevier, vol. 68(3), pages 578-586.
    35. Brosig-Koch, Jeannette & Helbach, Christoph & Ockenfels, Axel & Weimann, Joachim, 2011. "Still different after all these years: Solidarity behavior in East and West Germany," Journal of Public Economics, Elsevier, vol. 95(11), pages 1373-1376.
    36. Schauer, Catharina & Elsas, Ralf & Breitkopf, Nikolas, 2019. "A new measure of financial constraints applicable to private and public firms," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 270-295.
    37. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
    38. Bauernschuster, Stefan & Falck, Oliver & Gold, Robert & Heblich, Stephan, 2012. "The shadows of the socialist past: Lack of self-reliance hinders entrepreneurship," European Journal of Political Economy, Elsevier, vol. 28(4), pages 485-497.
    39. Snower, Dennis J. & Merkl, Christian, 2006. "The caring hand that cripples: The East German labor market after reunification (detailed version)," Kiel Working Papers 1263, Kiel Institute for the World Economy (IfW Kiel).
    40. Baumol, William J., 1996. "Entrepreneurship: Productive, unproductive, and destructive," Journal of Business Venturing, Elsevier, vol. 11(1), pages 3-22, January.
    41. Michael Wyrwich, 2010. "Assessing the role of strategy and socioeconomic heritage for rapidly growing firms: evidence from Germany," International Journal of Entrepreneurial Venturing, Inderscience Enterprises Ltd, vol. 1(3), pages 245-263.
    42. Dennis J. Snower & Christian Merkl, 2006. "The Caring Hand that Cripples: The East German Labor Market after Reunification," American Economic Review, American Economic Association, vol. 96(2), pages 375-382, May.
    43. Chang, Kiyoung & Noorbakhsh, Abbas, 2009. "Does national culture affect international corporate cash holdings?," Journal of Multinational Financial Management, Elsevier, vol. 19(5), pages 323-342, December.
    44. Michael Fritsch & Michael Wyrwich, 2014. "The Long Persistence of Regional Levels of Entrepreneurship: Germany, 1925-2005," Regional Studies, Taylor & Francis Journals, vol. 48(6), pages 955-973, June.
    45. Wyrwich, Michael, 2013. "Can socioeconomic heritage produce a lost generation with regard to entrepreneurship?," Journal of Business Venturing, Elsevier, vol. 28(5), pages 667-682.
    46. 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.
    47. Petrik Runst, 2013. "Post-Socialist Culture and Entrepreneurship," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(3), pages 593-626, July.
    48. Smallbone, David & Welter, Friederike, 2001. "The Distinctiveness of Entrepreneurship in Transition Economies," Small Business Economics, Springer, vol. 16(4), pages 249-262, June.
    49. Keefe, Michael O'Connor & Yaghoubi, Mona, 2016. "The influence of cash flow volatility on capital structure and the use of debt of different maturities," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 18-36.
    50. Lins, Karl V. & Servaes, Henri & Tufano, Peter, 2010. "What drives corporate liquidity? An international survey of cash holdings and lines of credit," Journal of Financial Economics, Elsevier, vol. 98(1), pages 160-176, October.
    51. John McMillan & Christopher Woodruff, 2002. "The Central Role of Entrepreneurs in Transition Economies," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 153-170, Summer.
    52. Erik Lehmann & Doris Neuberger & Solvig R”thke, 2004. "Lending to Small and Medium-Sized Firms: Is There an East-West Gap in Germany?," Small Business Economics, Springer, vol. 23(1), pages 23-39, August.
    53. Michael Wyrwich, 2015. "Entrepreneurship and the intergenerational transmission of values," Small Business Economics, Springer, vol. 45(1), pages 191-213, June.
    54. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    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. 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.
    2. Michael Wyrwich & Michael Stuetzer & Rolf Sternberg, 2016. "Entrepreneurial role models, fear of failure, and institutional approval of entrepreneurship: a tale of two regions," Small Business Economics, Springer, vol. 46(3), pages 467-492, March.
    3. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    4. Corsten, Daniel & Gropp, Reint E. & Markou, Panos, 2017. "Suppliers as liquidity insurers," IWH Discussion Papers 8/2017, Halle Institute for Economic Research (IWH).
    5. Ummar Aftab & Attiya Yasmin Javid & Waseem Akhter, 2018. "The Determinants of Cash Holdings around Different Regions of the World," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 10(2), pages 151-182, June.
    6. Cui, Weihan & Cuong, Ly Kim & Shimizu, Katsutoshi, 2020. "Cash policy and the bank-firm relationship," Economic Modelling, Elsevier, vol. 91(C), pages 804-818.
    7. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
    8. Paulo, Alves, 2018. "Abnormal retained earnings around the world," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 63-74.
    9. Ahrends, Meike & Drobetz, Wolfgang & Nomikos, Nikos K., 2018. "Corporate cash holdings in the shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 112(C), pages 107-124.
    10. Siamak Javadi & Abdullah‐Al Masum & Mohsen Aram & Ramesh P. Rao, 2023. "Climate change and corporate cash holdings: Global evidence," Financial Management, Financial Management Association International, vol. 52(2), pages 253-295, June.
    11. Sorgner, Alina & Wyrwich, Michael, 2022. "Calling Baumol: What telephones can tell us about the allocation of entrepreneurial talent in the face of radical institutional changes," Journal of Business Venturing, Elsevier, vol. 37(5).
    12. 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).
    13. Abdul Rashid & Maryam Ashfaq, 2017. "Financial Constraints And Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 1-26, June.
    14. Efstathios Magerakis & Ahsan Habib, 2022. "Environmental uncertainty and corporate cash holdings: The moderating role of CEO ability," International Review of Finance, International Review of Finance Ltd., vol. 22(3), pages 402-432, September.
    15. Cristina Martínez-Sola & Pedro J. García-Teruel & Pedro Martínez-Solano, 2018. "Cash holdings in SMEs: speed of adjustment, growth and financing," Small Business Economics, Springer, vol. 51(4), pages 823-842, December.
    16. Sun, Zhenzhen & Wang, Yaping, 2015. "Corporate precautionary savings: Evidence from the recent financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 175-186.
    17. Chang, Chong-Chuo & Yang, Han, 2022. "The role of cash holdings during financial crises," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    18. Tan, Jianhua & Chen, Tao & Zhang, Peng & Chan, Kam C., 2021. "Environmental rule enforcement and cash holdings: Evidence from a natural experiment," Economic Modelling, Elsevier, vol. 103(C).
    19. Alves, Paulo, 2018. "Cash holdings around the world: Financial crisis, culture and shareholder rights," MPRA Paper 89861, University Library of Munich, Germany, revised 2018.
    20. 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.

    More about this item

    Keywords

    Managerial decision-making; Corporate cash holdings; Speed of adjustment; SME; Cultural attributes; Germany;
    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
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Z1 - Other Special Topics - - Cultural Economics

    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:spr:jbecon:v:92:y:2022:i:2:d:10.1007_s11573-021-01055-8. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.