Therefore, the purpose of this work is to find out how cash holdings have developed over time and what company-specific factors influences them. In this context, we examine the period from 1988 to 2021, following closely the approach of Bates. The main question is whether the findings from the literature are transferable to Canadian companies or if there are differences.
To address this question, we will first briefly review the literature for the theoretical background in chapter 2, which we will refer to in our later empirical analysis. In chapter 3, we outline the composition and origin of our dataset, as well as the methodology. Chapter 4 looks at the development of cash and leverage holdings over the whole period. Section 5 examines whether there are sub-population specific differences in our dataset. In chapter 6, we utilize regression models of the cash ratios to see which corporate indicators have an impact on the cash ratios. Section 7 considers whether the agency theory has an impact on cash holdings. We conclude in chapter 8.
Cash holdings are one of the most important components of a company. As the cash holdings of U.S. companies have increased remarkably over the last decades, the question arises whether this is also true for the geographic neighboring country Canada. Therefore, this thesis analyzes the corporate cash holdings of Canadian public companies. While the cash holdings of U.S. companies are well studied on a broad scale in the finance literature and Opler, there are only a few publications on Canada.
Table of Contents
1 Introduction
2 Literature Review
3 Methodology
4 Development of Cash and Leverage Holdings
5 Cohort Specific Trends in Cash Holdings
6 Determinants of Cash Holdings
7 The Value of Cash Holdings
8 Conclusion
Objectives & Core Topics
This thesis investigates the development of corporate cash holdings of Canadian public companies from 1988 to 2021, examining whether factors identified in U.S.-based finance literature apply to the Canadian market and identifying specific firm characteristics that influence cash levels.
- Evolution of cash and leverage ratios in Canadian firms over three decades
- Impact of firm size, dividend policy, and initial public offerings on cash holdings
- Theoretical motivations for holding cash: transaction, precautionary, and agency motives
- Regression analysis of determinants influencing corporate cash ratios
- Assessment of the link between cash holdings and firm market value
Excerpt from the Book
Literature Review
The finance literature has identified several theoretical and practical evidence on the potential motivation for companies to change their cash holdings. The following chapter will review an excerpt of the theories and motivation for cash holdings and sustain them with empirical evidence. In the following, we will discuss the three most common theories, since an extension to other theories would go beyond the scope of this paper.
The first two theories, the transaction motive and the precautionary motive, were first mentioned by Keynes (1936). Whereas the agency motive comes from Jensen (1986). Behind the transaction motive theory for cash holdings is a value maximizing firm that evaluates the optimal marginal costs and marginal benefits of cash holdings to get an ideal cash ratio (Keynes, 1936). If the firm wants to raise funds and does not have the necessary amount of money, they must liquidate their assets instead to make payments (Keynes, 1936).
The second theory is about the precautionary motive also described by Keynes. This motive refers to a firm that holds a significant amount of cash out of uncertainty about the future. If the future is uncertain, so is the capital market. If there is a shortfall risk of cash and the firm has no cash reserves, the costs to access the capital market are high. (Keynes, 1936)
Summary of Chapters
1 Introduction: outlines the importance of corporate cash holdings and sets the research goal of analyzing Canadian public firms to test if U.S. literature findings are transferable.
2 Literature Review: reviews fundamental theoretical frameworks including transaction, precautionary, and agency motives for maintaining cash reserves.
3 Methodology: describes the dataset extracted from WRDS Compustat Global and the specific empirical approaches used for analysis.
4 Development of Cash and Leverage Holdings: provides descriptive statistics and visualization showing the long-term trends in cash and leverage ratios for Canadian companies.
5 Cohort Specific Trends in Cash Holdings: examines sub-populations of the sample categorized by size, dividend policy, and listing status to identify growth-related patterns.
6 Determinants of Cash Holdings: utilizes regression models to identify which corporate indicators significantly impact cash ratio levels.
7 The Value of Cash Holdings: analyzes the influence of cash holdings on firm value through specific regression models regarding shareholder and agency interests.
8 Conclusion: summarizes the findings and acknowledges the similarities and remaining differences between Canadian and U.S. corporate behavior regarding cash management.
Keywords
Corporate Finance, Cash Holdings, Canadian Public Companies, Leverage Ratios, Transaction Motive, Precautionary Motive, Agency Theory, Market Value, Capital Structure, Compustat, IPO, Dividend Policy, Firm Size, Regression Analysis, Financial Performance
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on understanding the development and determinants of corporate cash holdings within the Canadian public company sector between 1988 and 2021.
Which specific themes are covered in the core analysis?
The analysis covers the evolution of cash and leverage ratios, the influence of firm characteristics (size, dividends, accounting performance), and the impact of these cash levels on firm market value.
What is the primary research question being tested?
The primary question is whether existing financial theories and literature findings regarding corporate cash holdings observed in U.S. companies are transferable to the Canadian market.
Which scientific methods are employed in this study?
The study utilizes descriptive statistics and various empirical regression models, including Ordinary Least Squares (OLS) and Fama-MacBeth (FMB) regressions, to analyze large-scale company data.
What topics are addressed in the main body of the text?
The main body addresses the theoretical background, descriptive trends of cash and leverage development, cohort-specific trends based on firm characteristics, and regression-based determinants of cash holdings.
Which keywords best characterize this academic work?
Key terms include Corporate Finance, Cash Holdings, Transaction/Precautionary Motives, Agency Theory, Leverage, and Canadian Market Data.
How is the impact of firm size on cash holdings described?
The study finds that smaller firms tend to hold proportionally more cash than larger firms, which supports the transaction motive theory due to economies of scale.
What does the study conclude regarding the Agency Theory?
The study notes that while it attempts to incorporate agency theory by examining firm market value and dividend policy, the evidence remains mixed and does not provide an entirely clear confirmation for the Canadian sample.
- Citation du texte
- Maximilian Heilborn (Auteur), 2023, Cash Holdings of Canadian Public Companies, Munich, GRIN Verlag, https://www.grin.com/document/1322901
