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

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  • 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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Bibliographic Info

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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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
Phone: (0)1904 323776
Fax: (0)1904 323759
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Web page: http://www.york.ac.uk/economics/
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Keywords: Financial conservatism; leverage; cash holdings; ownership structure;

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References

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Cited by:
  1. Christopher F. Baum & Dorothea Schäfer & Oleksandr Talavera, 2006. "The Effects of Industry-Level Uncertainty on Cash Holdings: The Case of Germany," Boston College Working Papers in Economics 637, Boston College Department of Economics, revised 05 Aug 2006.
  2. Ramachandran Azhagaiah & Selvaraj Sathia, 2012. "Corporate Leverage and Financial Decision in the Indian Textile Industry," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 10(1 (Spring), pages 87-114.

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