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Rationality of Corporate Cash Holdings

Author

Listed:
  • Ai Oku

    (Chief Economist, Policy Research Institute)

  • Hayato Hashimoto

    (Former Senior Economist, Policy Research Institute)

  • Keigo Watanabe

    (Researcher, Policy Research Institute)

Abstract

Cash equivalents (cash/deposit) held by Japanese firms were as much as 222 trillion yen in Fiscal Year 2017, but their value is discounted by the market. The background may be that cash is not effectively used because it is built up with ROE remaining low. Individual firms may think that their cash holdings behavior is reasonable, but it does not improve market valuation and the firms fail to properly increase their corporate value. Means to improve corporate value using cash they hold may include investment in people and businesses, and return to shareholders if there are surplus funds. We analyzed the rate of stock price increase of firms that had acquired shares of its own shares, and found that the rate of stock price increase of gfirms with room for improvement in capital efficiency h is higher compared with gthe other firms. h In addition, investment toward human capital is important for firms f growth. Corporate managers are required to make more rational decisions concerning cash holdings also with consideration of valuation by the market.

Suggested Citation

  • Ai Oku & Hayato Hashimoto & Keigo Watanabe, 2018. "Rationality of Corporate Cash Holdings," Discussion papers ron310, Policy Research Institute, Ministry of Finance Japan.
    • Handle: RePEc:mof:wpaper:ron310
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    File URL: http://www.mof.go.jp/pri/research/discussion_paper/ron310.pdf
    File Function: First version, 2016
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    More about this item

    Keywords

    cash holdings; corporate governance; excess cash;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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