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Financial Disclosure Environment and the Cash Policy of Private Firms

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  • Marcelo Ortiz

Abstract

This paper proposes that greater transparency in the financial reporting environment facilitates the estimation of future liquidity needs and thus discourages financially constrained firms from accumulating cash for precautionary reasons. I examine this prediction using a sample of private firms from 12 European countries with disclosure mandates for public and private firms. The results indicate that private firms hold less cash when they operate in a more transparent reporting environment. Furthermore, I find that the decrease in cash holdings is more pronounced in industries with higher cash-deficit risk and for younger firms. The analysis of cash flow allocation indicates that cash reduction is driven by a higher fraction of cash flow being used to reduce debt and less cash saving out of cash flow, and not by more investment. Collectively, this study increases our understanding of how a transparent reporting environment influences the allocation of corporate cash among its alternative uses.

Suggested Citation

  • Marcelo Ortiz, 2020. "Financial Disclosure Environment and the Cash Policy of Private Firms," Working Papers 1148, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1148
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    References listed on IDEAS

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    More about this item

    Keywords

    disclosure regulation; cash policy; private firms;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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