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Determinants of Financial Conservatism: Evidence from Low-Leverage and Cash-Rich UK Firms

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Author Info
Alfonsina Iona
Leone Leonida
Aydin Ozkan
Abstract

This paper investigates the characteristics of firms that adopt persistent policies of low leverage and substantial cash reserves. In doing so, specific attention is paid to the role of internal corporate governance mechanisms in influencing firms' conservative financial policies. The analysis of this paper classifies firms as financially conservative if they adopt both low-leverage and high-cash policies at the same time. Using a large sample of non-financial UK firms over the period 1984-2001, we provide evidence that conservative firms tend to undershoot (overshoot) their target leverage (cash holdings) levels. Our results also suggest that managerial ownership, board composition and, to some extent, ownership concentration are important determinants of the probability of firms adopting conservative financial policies.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 04/01.

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Handle: RePEc:yor:yorken:04/01

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Related research
Keywords: Financial conservatism; leverage; cash holdings; ownership structure;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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