What Do We Know About Corporate Cash Holdings? A Systematic Analysis

• 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