What Do We Know About Corporate Cash Holdings? A Systematic Analysis
| Author | Alethéia Ferreira da Cruz,Herbert Kimura,Vinicius Amorim Sobreiro |
| Published date | 01 January 2019 |
| Date | 01 January 2019 |
| DOI | http://doi.org/10.1002/jcaf.22368 |
What Do We Know About
Corporate Cash Holdings?
A Systematic Analysis
Alethéia Ferreira da Cruz, Herbert Kimura and Vinicius Amorim Sobreiro
INTRODUCTION
Cash holdings play an
important role at the heart of
firms’policies. In fact, holding
cash is the most common way
for firms to ensure liquidity
(Almeida, Campello, Cunha, &
Weisbach, 2014). Cash reserves
allow firms to respond to unex-
pected changes in cash flows,
to fund daily operations, to
finance long-term investment,
and to hedge risk (Acharya,
Almeida, & Campello, 2007;
Almeida, Campello, &
Weisbach, 2004; Bates,
Kahle, & Stulz, 2009; Opler,
Pinkowitz, Stulz, &
Williamson, 1999).
Because cash represents a
valuable and strategic asset
(Haushalter, Klasa, &
Maxwell, 2007; Kim & Bettis,
2014), comprehending cash
policy is a relevant issue if we
want to enhance and refine our
knowledge regarding firm
value, corporate investment
and financing choices (Almeida
et al., 2014) and to understand
its implications for corporate
profitability, risk, and eco-
nomic growth (Acharya,
Almeida, Ippolito, & Perez,
2014; Campello, Giambona,
Graham, & Harvey, 2011;
Graham & Leary, 2016). In
this regard, three related facts
have contributed to strengthen
the importance of cash hold-
ings in the corporate
finance field.
First, a dramatic increase
in cash reserves has been
noticed in both U.S. firms and
firms abroad in recent years
(Almeida et al., 2014; Bates,
Chang, & Chi, 2018; Cole,
2014; Le Guyader, 2012; Mar-
cum, Martin, & Strickland,
2011; Marcum, Martin, &
Strickland, 2012; Orlova &
Rao, 2018; Phan, Nguyen,
Nguyen, & Hegde, 2019;
Prescott, 2015). Among non-
financial S&P 500 firms, cash
holdings increased fivefold
from 1996 to 2012, reaching
$1,334 billion (Almeida et al.,
2014). Not only absolute but
also relative values of cash
holdings have experienced a
consistent growth all over the
world, Chen, Dou, Rhee,
Truong, and Veeraraghavan
(2015) cite a study from the
International Institute of
Finance that estimated corpo-
rations in the United States,
Euro Zone, the United King-
dom, and Japan to hold $7.75
trillion in cash or cash equiva-
lent. The authors also find that
the median cash to total asset
ratios varied over the period
1989–2009: from 2.3% for
New Zealand to 3.6% for
Russia, 5.2% for Australia,
8.0% for Finland, 10.1% for
Sweden, 13.7% for Singapore,
and 16.6% for Hong Kong.
Focusing on two different
times in a 20-year window
using Compustat Global Data,
we confirm this upward trend
for cash-holding ratios around
the world, as shown in
Exhibit 1, Cash ratio average
(percentage) across the world
in 1994 and 2013.
© 2019 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22368 77
Second, cash holdings are
closely related to firms’financ-
ing choices. As a financing
instrument, cash holdings can
be used to undertake profitable
investment opportunities
(Ferreira & Vilela, 2004), to
reduce the cost of accessing
external financing (Almeida
et al., 2004), to service debt dur-
ing economic distress (Acharya
et al., 2007), and to serve as a
resource during difficult times
(Campello et al., 2011).
Third, cash holdings are
also linked to risk management
strategy. As a risk management
tool, cash might reduce cash
flow volatility and consequently
mitigate financial risks that
could affect a firm’s future
profits (Acharya et al., 2007).
Nonetheless, holding cash is not
costless due to the presence of
transaction costs such as taxes
and flotation fees, implying the
value of maintaining cash
(Faulkender & Wang, 2006).
Moreover, if cash is used to
protect against future shortfalls,
firms might bypass interesting
investment opportunities, par-
ticularly when facing financing
constraints (Almeida et al.,
2004; Bates et al., 2009).
Supporting this view, Almeida
et al. (2004) shed light on the
cash holdings sensitivity to cash
flows when a firm faces finan-
cial constraints. If a firm is
financially constrained, it may
have to incorporate savings
from incremental cash flows
to protect its future. As a
result, the firm might hold a
considerable portion of cash as
a hedging tool for downturns.
In the cash holdings litera-
ture, some researchers focus on
why firms hold cash, how firms
employ cash in corporate deci-
sions and what the real conse-
quences of corporate cash
choices are.
Interest in corporate cash
holdings extends back at least
as far as Keynes (1936). Nota-
bly, growth has occurred in the
literature since the mid-1990s,
when cash holdings became an
active topic in liquidity
research, as shown in Exhibit 2,
Papers published by year.
Although a considerable
body of work has been pro-
duced, there remains a lack of
Exhibit 1
Cash Ratio Average (%) Across the World in 1994 and 2013.
Australia
Austria
Belgium
Brazil
Chile
China
Denmark
Finland
France
Germany
Greece
Hong Kong
India
Indonesia
Ireland
Israel
Italy
Japan
Luxembourg
Malaysia
Mexico
Morocco
Netherlands
N
ew Zealand
Nigeria
Norway
Pakistan
Philippines
Poland
Portugal
Saudi Arabia
Singapore
South Africa
South Korea
Spain
Sri Lanka
Sweden
Switzerland
Taiwan
Thailand
UK
Venezuela
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
34
32
Cash ratio average: cash and equivalents/total assets (%)
1994
2013
The Journal of Corporate Accounting & Finance / January 201978
DOI 10.1002/jcaf © 2019 Wiley Periodicals, Inc.
research that compiles and sys-
tematizes the available knowl-
edge on cash holdings. Thus,
understanding and mapping the
debate on corporate cash hold-
ings may provide better insight
about the direction for research
and help to identify potential
gaps. We therefore focus on two
main questions: What do we
know about cash holdings?
What are the main insights on
which to focus regarding future
research on cash holdings?
To address these questions,
we present a systematic literature
review of nearly 290 papers pub-
lished from 1997 to 2017,
pinpointing the most relevant
articles on cash holdings and
identifying major gaps in the
current literature following Lage
Junior and Godinho Filho
(2010), Seuring (2013), and
Jabbour (2013)’s methodology.
The remainder of the paper
is organized as follows.
Section 2 describes the research
design, highlighting the
method, and the database of
scientific papers investigated in
our review (e.g., Scopus, Web
of Science, etc.). Section 3 pro-
vides the main approaches on
corporate cash holdings.
Section 4 delineates the fea-
tures of the analyzed articles,
including papers cited most
often, scholar networks, and
the research pathway on cash
holdings. In Section 5, research
gaps are identified and sugges-
tions are made regarding ave-
nues for future research.
Section 6 presents the conclud-
ing remarks.
RESEARCH DESIGN
Following the methods of
Lage Junior and Godinho
Filho (2010), Seuring (2013),
and Jabbour (2013) for the pro-
posed literature review and
research agenda, we performed
a wide search of published
papers from 1997 to 2017 in
different academic journal
databases, including Scopus,
Wiley,Web of Science (WOS),
Academic Search Complete
PLUS (Ebsco),JSTOR,
Taylor & Francis,Emerald, and
Springer. This methodology
allowed us to track the evolu-
tion and the main contributions
of the cash holding research
and to identify challenges and
insights for future research in
the field. We focused on
Exhibit 2
Papers Published by Year.
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0
5
10
15
20
25
30
35
40
45
50
55
60
65
Number of papers
The Journal of Corporate Accounting & Finance / January 2019 79
© 2019 Wiley Periodicals, Inc. DOI 10.1002/jcaf
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