IDEAS home Printed from https://ideas.repec.org/p/sol/wpaper/2013-154161.html
   My bibliography  Save this paper

Bank Cash Holdings and Investor Uncertainty

Author

Listed:
  • Benoît D'Udekem

Abstract

Cash holdings have often been presumed to help resolve the inherent uncertainty of assessing banks. Nonetheless, extant empirical evidence is inconclusive. The present paper adopts a novel approach to assessing the level of stockholder uncertainty associated with the cash holdings reported by European banks before, during, and after the financial crisis of 2007-2009. The paper finds that stockholder uncertainty may be significant when cash holdings exceed or fall short of the levels warranted to meet depositor demands. It concludes that investors monitor bank cash holdings in relation to short-term liabilities. Cash holdings may thus contribute to making banks more opaque.

Suggested Citation

  • Benoît D'Udekem, 2014. "Bank Cash Holdings and Investor Uncertainty," Working Papers CEB 14-002, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/154161
    as

    Download full text from publisher

    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/154161/3/wp14002.pdf
    File Function: wp14002
    Download Restriction: no

    References listed on IDEAS

    as
    1. Drobetz, Wolfgang & Grüninger, Matthias C. & Hirschvogl, Simone, 2010. "Information asymmetry and the value of cash," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2168-2184, September.
    2. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. Ashoka Mody & Damiano Sandri, 2012. "The eurozone crisis: how banks and sovereigns came to be joined at the hip," Economic Policy, CEPR;CES;MSH, vol. 27(70), pages 199-230, April.
    4. Huang, Rocco & Ratnovski, Lev, 2011. "The dark side of bank wholesale funding," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 248-263, April.
    5. Ari Hyytinen & Tuomas Takalo, 2002. "Enhancing Bank Transparency: A Re-assessment," Review of Finance, European Finance Association, vol. 6(3), pages 429-445.
    6. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, M., 2004. "Market evidence on the opaqueness of banking firms' assets," Journal of Financial Economics, Elsevier, vol. 71(3), pages 419-460, March.
    7. Hesna Genay, 1998. "Assessing the condition of Japanese banks: how informative are accounting earnings?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 12-34.
    8. Ratnovski, Lev, 2013. "Liquidity and transparency in bank risk management," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 422-439.
    9. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(2), pages 238-249, April.
    10. Womack, Kent L, 1996. " Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-167, March.
    11. Roger K. Loh & René M. Stulz, 2011. "When Are Analyst Recommendation Changes Influential?," Review of Financial Studies, Society for Financial Studies, vol. 24(2), pages 593-627.
    12. Boni, Leslie & Womack, Kent L., 2006. "Analysts, Industries, and Price Momentum," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(01), pages 85-109, March.
    13. Szafarz, Ariane, 2012. "Financial crises in efficient markets: How fundamentalists fuel volatility," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 105-111.
    14. Paul Goldsmith-Pinkham & Tanju Yorulmazer, 2010. "Liquidity, Bank Runs, and Bailouts: Spillover Effects During the Northern Rock Episode," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(2), pages 83-98, June.
    15. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2012. "Opaque banks, price discovery, and financial instability," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 383-408.
    16. Dushyantkumar Vyas, 2011. "The Timeliness of Accounting Write‐Downs by U.S. Financial Institutions During the Financial Crisis of 2007–2008," Journal of Accounting Research, Wiley Blackwell, vol. 49(3), pages 823-860, June.
    17. Billett, Matthew T & Garfinkel, Jon A, 2004. "Financial Flexibility and the Cost of External Finance for U.S. Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 827-852, October.
    18. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, Mahendrarajah, 2013. "The 2007–2009 financial crisis and bank opaqueness," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 55-84.
    19. 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.
    20. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    21. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
    22. Chung, Dennis & Hrazdil, Karel, 2010. "Liquidity and market efficiency: A large sample study," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2346-2357, October.
    23. Loh, Roger & Stulz, Rene M., 2013. "Is Sell-Side Research More Valuable in Bad Times?," Working Paper Series 2013-19, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    24. AltInkIlIç, Oya & Hansen, Robert S., 2009. "On the information role of stock recommendation revisions," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 17-36, October.
    25. Robert Faff, 2004. "A simple test of the Fama and French model using daily data: Australian evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 83-92.
    26. Alexander Ljungqvist & Christopher Malloy & Felicia Marston, 2009. "Rewriting History," Journal of Finance, American Finance Association, vol. 64(4), pages 1935-1960, August.
    27. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    28. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    29. Viral Acharya & Sergei A. Davydenko & Ilya A. Strebulaev, 2012. "Cash Holdings and Credit Risk," Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3572-3609.
    30. Viral V. Acharya & Hyun Song Shin & Tanju Yorulmazer, 2011. "Crisis Resolution and Bank Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2166-2205.
    31. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    32. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
    33. Cremers, Martijn & Petajisto, Antti & Zitzewitz, Eric, 2013. "Should Benchmark Indices Have Alpha? Revisiting Performance Evaluation," Critical Finance Review, now publishers, vol. 2(1), pages 1-48, July.
    34. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
    35. Miles Livingston & Andy Naranjo & Lei Zhou, 2007. "Asset Opaqueness and Split Bond Ratings," Financial Management, Financial Management Association International, vol. 36(3), pages 49-62, September.
    36. Wagner, Wolf, 2007. "Financial development and the opacity of banks," Economics Letters, Elsevier, vol. 97(1), pages 6-10, October.
    37. Giuliano Iannotta, 2006. "Testing for Opaqueness in the European Banking Industry: Evidence from Bond Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 30(3), pages 287-309, December.
    38. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    39. Wagner, Wolf, 2007. "The liquidity of bank assets and banking stability," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 121-139, January.
    40. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2013. "Valuation and systemic risk consequences of bank opacity," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 693-706.
    41. Flannery, Mark J, 1994. "Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms," American Economic Review, American Economic Association, vol. 84(1), pages 320-331, March.
    42. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Banks; liquidity; opaque assets; stockholder uncertainty;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:sol:wpaper:2013/154161. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels). General contact details of provider: http://edirc.repec.org/data/cebulbe.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.