IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v68y2020icp150-166.html
   My bibliography  Save this article

Precautionary motives for private firms’ cash holdings

Author

Listed:
  • Potì, Valerio
  • Pattitoni, Pierpaolo
  • Petracci, Barbara

Abstract

In this paper, we focus on the precautionary motive for holding cash in private firms. We check novel implications of such motive that arise under conditions that are typical of private firms. Because of the incomplete separation of the finances of these firms from the finances of the owner, we also complement the traditional precautionary motive with a novel variant that considers stakeholders’ risk attitudes. We find empirical evidence consistent with both versions of the precautionary motive though some of the implications of the traditional precautionary motive, in the form of the hedging motive, are unsupported by the data.

Suggested Citation

  • Potì, Valerio & Pattitoni, Pierpaolo & Petracci, Barbara, 2020. "Precautionary motives for private firms’ cash holdings," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 150-166.
    • Handle: RePEc:eee:reveco:v:68:y:2020:i:c:p:150-166
    DOI: 10.1016/j.iref.2020.03.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056020300496
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2020.03.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Gao, Huasheng & Harford, Jarrad & Li, Kai, 2013. "Determinants of corporate cash policy: Insights from private firms," Journal of Financial Economics, Elsevier, vol. 109(3), pages 623-639.
    3. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2003. "International Corporate Governance and Corporate Cash Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 111-133, March.
    4. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    5. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
    6. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    7. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    8. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    9. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    10. Alice Adams Bonaimé & Kristine Watson Hankins & Jarrad Harford, 2014. "Financial Flexibility, Risk Management, and Payout Choice," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1074-1101.
    11. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    12. Rodrigo F. Durán & M. Belén Lozano & Serhat Yaman, 2016. "Is Family Control Relevant for Corporate Cash Holding Policy?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 43(9-10), pages 1325-1360, October.
    13. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    14. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
    15. Han, Seungjin & Qiu, Jiaping, 2007. "Corporate precautionary cash holdings," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 43-57, March.
    16. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    17. Jarrad Harford & Sattar A. Mansi & William F. Maxwell, 2012. "Corporate Governance and Firm Cash Holdings in the U.S," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 107-138, Springer.
    18. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    19. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    20. Kerins, Frank & Smith, Janet Kiholm & Smith, Richard, 2004. "Opportunity Cost of Capital for Venture Capital Investors and Entrepreneurs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 385-405, June.
    21. Ali Uyar & Cemil Kuzey, 2014. "Determinants of corporate cash holdings: evidence from the emerging market of Turkey," Applied Economics, Taylor & Francis Journals, vol. 46(9), pages 1035-1048, March.
    22. Pattitoni, Pierpaolo & Petracci, Barbara & Potì, Valerio & Spisni, Massimo, 2013. "Cost of entrepreneurial capital and under-diversification: A Euro-Mediterranean perspective," Research in International Business and Finance, Elsevier, vol. 27(1), pages 12-27.
    23. Gollier, Christian, 1996. "Decreasing absolute prudence: Characterization and applications to second-best risk sharing," European Economic Review, Elsevier, vol. 40(9), pages 1799-1815, December.
    24. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    25. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Huu Manh Nguyen & Thi Huong Giang Vuong & Thi Huong Nguyen & Yang-Che Wu & Wing-Keung Wong, 2020. "Sustainability of Both Pecking Order and Trade-Off Theories in Chinese Manufacturing Firms," Sustainability, MDPI, vol. 12(9), pages 1-25, May.
    2. Shahzad, Farrukh & Ahmad, Munir & Fareed, Zeeshan & Wang, Zhenkun, 2022. "Innovation decisions through firm life cycle: A new evidence from emerging markets," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 51-67.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abdul Rashid & Maryam Ashfaq, 2017. "Financial Constraints And Corporate Cash Holdings: An Empirical Analysis Using Firm Level Data," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 1-26, June.
    2. Gupta, C.P. & Bedi, Prateek, 2020. "Corporate cash holdings and promoter ownership," Emerging Markets Review, Elsevier, vol. 44(C).
    3. Maurizio Rocca & Raffaele Staglianò & Tiziana Rocca & Alfio Cariola & Ekaterina Skatova, 2019. "Cash holdings and SME performance in Europe: the role of firm-specific and macroeconomic moderators," Small Business Economics, Springer, vol. 53(4), pages 1051-1078, December.
    4. 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.
    5. Cristina Martínez-Sola & Pedro J. García-Teruel & Pedro Martínez-Solano, 2018. "Cash holdings in SMEs: speed of adjustment, growth and financing," Small Business Economics, Springer, vol. 51(4), pages 823-842, December.
    6. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    7. Davide Dottori & Giacinto Micucci, 2018. "Corporate liquidity in Italy and its increase in the long recession," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(3), pages 981-1014, December.
    8. Domenico Rocco Cambrea & Andrea Calabrò & Maurizio La Rocca & Francesco Paolone, 2022. "The impact of boards of directors’ characteristics on cash holdings in uncertain times," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 26(1), pages 189-221, March.
    9. 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.
    10. 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.
    11. Brown, James R. & Petersen, Bruce C., 2011. "Cash holdings and R&D smoothing," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 694-709, June.
    12. Mar𨁂el鮠Lozano & Simone Caltabiano, 2015. "Cross institutional cash and dividend policies: focusing on Brazilian firms," Applied Economics, Taylor & Francis Journals, vol. 47(3), pages 239-254, January.
    13. Ahrends, Meike & Drobetz, Wolfgang & Nomikos, Nikos K., 2018. "Corporate cash holdings in the shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 112(C), pages 107-124.
    14. Hsuan-Chu Lin & She-Chih Chiu, 2017. "Tradeoff on corporate cash holdings: a theoretical and empirical analysis," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 727-763, October.
    15. Tahir Akhtar & Mohammad Ali Tareq & Kashif Rashid, 2023. "The role of shareholders and creditors' rights in affecting cash holdings and firm value: A recent evidence from ASEAN," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 929-961, January.
    16. Alves, Paulo, 2018. "Cash holdings around the world: Financial crisis, culture and shareholder rights," MPRA Paper 89861, University Library of Munich, Germany, revised 2018.
    17. Jan Felix Weidemann, 2018. "A state-of-the-art review of corporate cash holding research," Journal of Business Economics, Springer, vol. 88(6), pages 765-797, August.
    18. Efstathios Magerakis & Konstantinos Gkillas & Christos Floros & George Peppas, 2022. "Corporate R&D intensity and high cash holdings: post-crisis analysis," Operational Research, Springer, vol. 22(4), pages 3767-3808, September.
    19. Saleh F. A. Khatib & Dewi Fariha Abdullah & Ernie Hendrawaty & Ahmed A. Elamer, 2022. "A bibliometric analysis of cash holdings literature: current status, development, and agenda for future research," Management Review Quarterly, Springer, vol. 72(3), pages 707-744, September.
    20. Elyasiani, Elyas & Movaghari, Hadi, 2022. "Determinants of corporate cash holdings: An application of a robust variable selection technique," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 967-993.

    More about this item

    Keywords

    Cash holdings; Private firms; Precautionary motive; Financing policies;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:68:y:2020:i:c:p:150-166. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.