The Determinants of Corporate Cash Holdings: An Empirical Investigation on South Africa Companies

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Abstract

Determinants of cash holdings have been subject of focus for much of the available literature. However, this study has taken on a new path that has been a missing link in the existing literature so far. This paper empirically examined the cash holdings of business group members as compared to stand-alone firms. First of all, we hypothesize that business group members hold smaller amounts of cash on their balance sheets. We show that the cash policy of affiliates and stand-alone indeed differs while controlling for firm specific determinants of cash. The study has been based on a sample of South Africa industrial firms over the period 2005-2010.

This paper studied the cash policies of business group affiliates and found that this type of firms held smaller amounts of cash on their balance sheets than comparable stand-alones while controlling for other cash determinants. This confirmed to the hypothesis that marginal benefits of holding cash are smaller for affiliates. Our results also show that subsidiaries part of a business group with a high likelihood of financial distress hold even smaller amounts of cash on their balance sheets than other affiliates. This confirms the findings at firm level where the firms' bankruptcy risk also has a negative effect on their cash holdings. This also contrasts with expectations based on the precautionary motive. We find that cash holdings of subsidiaries are a negative function of the likelihood of financial distress at group level. This suggests that cash holdings of affiliates are reallocated to fulfil commitments at group level to alleviate the group's bankruptcy risk.

We believe that there is further need for some research which could compare the cash adjustment process over time of affiliates belonging to a financially stronger group and those subsidiaries part of financially stronger groups.

TABLE OF CONTENTS

CHAPTER I: INTRODUCTION1

1.1Background & Purpose of the Study1

1.2Aims of the study1

1.3Research Questions3

1.4Consideration of Rigour3

1.5Ethical Concerns3

1.6Limitations of Study4

1.7Structure of the Dissertation6

1.8Summary7

CHAPTER II: LITERATURE REVIEW8

2.1 Cash Holdings8

2.2 Determinants of Cash holdings9

2.3. Trade-off Theory10

2.4. Agency Costs Theory11

2.5. Free Cash Flow Hypothesis12

2.6. Pecking Order Theory13

2.7. Asymmetric Information Theory14

2.8. The Market Timing Hypothesis16

2.9. The Transaction Cost Theory17

2.10. Life Stage Theory18

2.11. Literature Summary18

CHAPTER 3: METHODOLOGY20

3.1 Introduction20

3.2 Summary of research methods20

3.3 Research Design21

3.4 Research Philosophy23

3.5 Hypothesize Development25

3.5 Data Collection29

3.6 Individual firm determinants of cash29

CHAPTER 4: FINDINGS AND DISCUSSION33

CHAPTER 5: CONCLUSION49

5.1 Limitations of the study50

CHAPTER I: INTRODUCTION

Background & Purpose of the Study

In order to evaluate any company from investment point of view, one of the fundamental element of consideration is company's balance sheet with in which an investor can assess the capital structure and resolve if the company is good enough for investment or not. Capital structure represents how the company management has decided to finance the operations and capital expenditure for long term growth and development. Funding can be done either through equity or debt. Equity represents the shareholders contribution in the company financing while liabilities are external source of funding for the company. The purpose of this study is to ...