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Partial adjustment toward optimal cash holding levels

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  • Venkiteshwaran, Vinod

Abstract

Recognizing that industry and capital market conditions may impede a firm's desire to achieve its targeted cash holding levels, we estimate a dynamic model that allows firms to adjust their cash holding levels over time and find evidence consistent with a trade-off type behavior in cash holding levels. We estimate a partial adjustment model and find that firms rapidly correct any deviation from their targeted cash levels. A typical firm in our sample closes this gap within two years. Inconsistent with the agency view of excess cash holdings, we find that cash holding levels for firms with excess cash persists over time compared to those that have a deficit. We also find that smaller firms typically hold excess cash and are quicker to correct deviations than large firms consistent with the view that it is more costly for financially constrained firms to operate at sub-optimal levels of liquid assets.

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  • Venkiteshwaran, Vinod, 2011. "Partial adjustment toward optimal cash holding levels," Review of Financial Economics, Elsevier, vol. 20(3), pages 113-121, August.
    • Handle: RePEc:eee:revfin:v:20:y:2011:i:3:p:113-121
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    8. Orlova, Svetlana V. & Sun, Li, 2018. "Institutional determinants of cash holdings speed of adjustment," Global Finance Journal, Elsevier, vol. 37(C), pages 123-137.
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    19. Tanveer Ahsan & Muhammad Azeem Qureshi, 2017. "The impact of financial liberalization on capital structure adjustment in Pakistan: a doubly censored modelling," Applied Economics, Taylor & Francis Journals, vol. 49(41), pages 4148-4160, September.
    20. Hakim Lyngstadaas, 2020. "Packages or systems? Working capital management and financial performance among listed U.S. manufacturing firms," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(4), pages 403-450, December.
    21. Orlova, Svetlana V. & Rao, Ramesh P., 2018. "Cash holdings speed of adjustment," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 1-14.
    22. Efstathios Magerakis & Konstantinos Gkillas & Athanasios Tsagkanos & Costas Siriopoulos, 2020. "Firm Size Does Matter: New Evidence on the Determinants of Cash Holdings," JRFM, MDPI, vol. 13(8), pages 1-35, July.
    23. Constantine Barasa & Constantine Barasa & George Achoki & Amos Njuguna, 2018. "Managers Views on the Determinants of Cash Holdings: Evidence from Kenya," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(8), pages 172-172, August.
    24. Qazi Awais Amin & Tom Williamson, 2021. "Firms cash management, adjustment cost and its impact on firms’ speed of adjustment: a cross country analysis," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 53-89, January.
    25. Gupta, C.P. & Bedi, Prateek, 2020. "Corporate cash holdings and promoter ownership," Emerging Markets Review, Elsevier, vol. 44(C).

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