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An Analysis of the Corporate Cash Holding Decision

Author

Listed:
  • D'Mello, Ranjan

    (Wayne State University)

  • Krishnaswami, Sudha

    (University of New Orleans)

  • Larkin, Patrick J.

    (Fayetteville State University)

Abstract

We investigate the tradeoff theory as an explanation for how managers allocate cash to post-spin-off parent and subsidiary firms. Spin-offs provide an opportunity to examine the determinants of cash holdings free from the confounding effects of the pecking order theory. Our results indicate that difference in asset size, sales growth, research and development expenses, net working capital, and leverage significantly affect the difference in cash holdings of post-spin-off entities. These results suggest that cash holdings are decreasing in the ease of raising cash and availability of cash from internal sources, and are increasing in growth opportunities, asymmetric information levels, and financial distress costs.

Suggested Citation

  • D'Mello, Ranjan & Krishnaswami, Sudha & Larkin, Patrick J., 2005. "An Analysis of the Corporate Cash Holding Decision," Working Papers 2005-02, University of New Orleans, Department of Economics and Finance.
  • Handle: RePEc:uno:wpaper:2005-02
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    More about this item

    Keywords

    Trade-off theory; Spin-off; Cash holding;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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