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

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Table of Contents

CHAPTER I: INTRODUCTION3

1.1Background & Purpose of the Study3

1.2Aims of the study3

1.3Research Questions5

1.4Consideration of Rigour5

1.5Ethical Concerns5

1.6Limitations of Study6

1.7Structure of the Dissertation8

1.8Summary9

CHAPTER II: LITERATURE REVIEW10

2.1 Cash Holdings10

2.2 Determinants of Cash holdings12

2.3. Trade-off Theory13

2.4. Agency Costs Theory14

2.5. Free Cash Flow Hypothesis15

2.6. Pecking Order Theory16

2.7. Asymmetric Information Theory17

2.8. The Market Timing Hypothesis19

2.9. The Transaction Cost Theory21

2.10. Life Stage Theory21

2.11 Hypothesize Development22

2.11. Literature Summary & Research Gap25

REFERENCES27

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 assess the impact of capital structure on the performance of the firms.

The main objective of any organization is to maximize the shareholder's health. The determination of cash holdings, that is the percentage of cash that a company holds during any particular period of time, is one of the most critical decisions in this regard. Theoretically, the optimal cash holdings are at the point where the benefits of holding cash exceed its cost.

Aims of the study

The goal of this paper is to empirically examine 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 precautionary motive to hold cash is less important for business group members as the capacity to obtain financial debt does not affect their cash policy. It does, however, have an influence on the cash holdings of stand-alone firms. These firms hold smaller amounts of cash when they have a greater capacity to obtain financial debt. Furthermore, we find that the usage of internal funds lowers the affiliates' cash holdings. The more subsidiaries depend on the internal capital market as a source of funds, the less cash is held. The results also indicate that subsidiaries hold smaller amounts of precautionary cash holdings when guarantees are received from fellow affiliates. Finally, it can be expected that firms belonging to financially weaker groups hold more cash than affiliates of financially stronger groups as they no longer can depend on the internal capital market. Interestingly, the results show the opposite: affiliates of business groups with a high likelihood of financial distress hold even less cash than other subsidiaries. This suggests that the group's central cash management steps in when the likelihood of financial distress at ...