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Firm structure and corporate cash holdings

Author

Listed:
  • Subramaniam, Venkat
  • Tang, Tony T.
  • Yue, Heng
  • Zhou, Xin

Abstract

We analyze whether the organizational structure of firms (i.e., whether a firm is diversified or focused) affects their cash holdings. Using Compustat firm level and segment-level data, we find that diversified firms hold significantly less cash than their focused counterparts. Our results are robust to industry adjustments at the segment level and to different factors previously found to be important determinants of cash holdings. Using time-series, cross-sectional, and additional robustness tests we are able to attribute the lower cash holdings among diversified firms to complementary growth opportunities across the different segments of these firms and the availability of active internal capital markets. We find that the other theories that rely on the potentially effective use of asset sales of non-core segments of diversified firms to generate cash, and the increased agency/influence costs in diversified firms do not offer an economically significant explanation for the lower cash holdings among diversified firms.

Suggested Citation

  • Subramaniam, Venkat & Tang, Tony T. & Yue, Heng & Zhou, Xin, 2011. "Firm structure and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 759-773, June.
  • Handle: RePEc:eee:corfin:v:17:y:2011:i:3:p:759-773
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    3. Thang Nguyen & Charlie X. Cai & Patrick McColgan, 2017. "How firms manage their cash flows: an examination of diversification’s effect," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 701-724, April.
    4. Alhenawi, Yasser & Krishnaswami, Sudha, 2015. "Long-term impact of merger synergies on performance and value," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 93-118.
    5. Rashid Ameer, 2012. "Impact of cash holdings and ownership concentration on firm valuation: Empirical evidence from Australia," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(4), pages 448-467, October.
    6. May, Anthony D., 2014. "Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 410-429.
    7. Itzkowitz, Jennifer, 2013. "Customers and cash: How relationships affect suppliers' cash holdings," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 159-180.
    8. repec:kap:rqfnac:v:49:y:2017:i:4:d:10.1007_s11156-017-0616-2 is not listed on IDEAS
    9. Denis, David J., 2011. "Financial flexibility and corporate liquidity," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 667-674, June.
    10. Davide Dottori & Giacinto Micucci, 2018. "Corporate liquidity in Italy and its increase in the long recession," Questioni di Economia e Finanza (Occasional Papers) 420, Bank of Italy, Economic Research and International Relations Area.
    11. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    12. Sasaki, Takafumi, 2016. "Financial cash flows and research and development investment," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 1-15.
    13. Hamid Ravanpak Noodezh & Ali Amiri & Niloufar Ghany, 2016. "Investigate the Capital Structure on the Transparency of the Financial Reporting in the Listed Companies in the Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(3), pages 243-254, July.
    14. USHIJIMA Tatsuo, 2016. "The More-Money and Less-Cash Effects of Diversification: Evidence from Japanese firms," Discussion papers 16029, Research Institute of Economy, Trade and Industry (RIETI).
    15. Rudolph, Christin & Schwetzler, Bernhard, 2014. "Mountain or molehill? Downward biases in the conglomerate discount measure," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 420-431.
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