Year: 2012
Type: dissertation
Abstract: The purpose of this study is to analyze the role of precautionary cash holding motive in explaining increased cash ratios within European firms during period 1995 -2010.Financial literature discusses the explanatory role of several cash holding motives but recently it has been especially the precautionary motive that has received the strongest support among practitioners.Whereas firms have both internal and external sources for cash, in this study I investigate which of these sources has been the most common source for cash savings.Moreover, the role of equity issuances and their interaction between precautionary motivesis examined empirically in detail. DATAThe data used in the study consists of active and non-active public companies within EU15 countries.Due to their distinctive nature, utilities and companies in financial sector are excluded from the sample.Time period for study is 1995 -2010 and additional sub-period of 1995 -2006 is also widely used in order to exclude the effects of recent financial crisis from time trend tests.Primary source for data is Thomson ONE Banker Worldscope database.The final sample includes a total of 41,144 firm-year observations.RESULTS I find evidence on significantly increased cash ratios for sample firms during period 1995 -2006 and that there is a clear positive connection between the scope of precautionary motives and cash holdings.Together with increasing cash holding, firms have not increased their leverage correspondingly which has led to decreased net debt levels for the sample.I further conclude that increase in cash ratios is mainly financed with equity issuances as they are by far the main source for cash savings when compared to other alternatives.Finally, and most importantly, empirical tests show that within-firm increase in precautionary motives cause within-firm increase in the amount of cash saved from equity issuances.
Source: Aaltodoc (Aalto University)
Author: Matti Mustonen
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2600664036