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Changes in cash holdings around the S&P 500 additions

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  • Brisker, Eric R.
  • Çolak, Gönül
  • Peterson, David R.

Abstract

We analyze the changes in cash holding policies of S&P 500 firms from before to after their inclusion in the index. One year after inclusion, their mean industry-adjusted cash holdings decline by nearly 32% from the year before inclusion. Several factors explain this decline. The precautionary motive for cash subsides due to these firms becoming more visible, less uncertain, and less constrained to raise cheap external capital. Corporate governance deteriorates after inclusion due to increased managerial entrenchment, which leads to a reduction in cash as suggested by the free cash flow hypothesis. Most index firms face diminishing investment opportunities and decreasing capital expenditures, which implies a lesser need for cash holdings related to the transaction motive.

Suggested Citation

  • Brisker, Eric R. & Çolak, Gönül & Peterson, David R., 2013. "Changes in cash holdings around the S&P 500 additions," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1787-1807.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:5:p:1787-1807
    DOI: 10.1016/j.jbankfin.2013.01.021
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    More about this item

    Keywords

    Cash holdings; Corporate governance; Liquidity policy; S&P 500 Index;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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