[Cash Holdings and Corporate Diversification]

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Acknowledgement

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DECLARATION

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Abstract

This paper investigates the relative between corporate diversification and the worth of corporate cash holdings. We evolve four vying hypotheses founded on effective interior capital market, bureau difficulties, coinsurance result, and shareholder-bondholder conflicts. We find that the worth of cash holdings is smaller in diversified corporate s than single-segment corporate s, an outcome both statistically and economically significant. We find that corporate diversification is affiliated with a smaller worth of cash in both financially unconstrained and guarded corporate s, and that the worth of cash is even smaller for the diversified corporate s with more limits on shareholder rights. The outcome are most reliable with the understanding that corporate diversification decreases the worth of corporate cash holdings through bureau problems.

CHAPTER 01: INTRODUCTION

Introduction

Recent work has documented an amazing boost in the corporate cash holdings of American corporate s. For demonstration, an item in the Wall Street Journal articles that “Some 174 S&P Industrial businesses held $295 billion in cash for the first quarter of 2006”, and states that “The stacks of cash … have strike record levels”.1 Bates, Kahle and Stulz (2006) display the outcome that the mean cash to asset ratio for developed corporate s more than doubles from 10.48% to 24.03% between 1980 and 2004. Given such a large allowance of corporate cash holdings, the valuation of cash holdings from a shareholder's viewpoint becomes an intriguing topic. Faulkender and Wang (2006) analyze the relative between corporate economic principles and the worth of cash holdings. Dittmar and Mahrt-Smith (2007) enquire the influence of corporate governance on the worth of cash holdings. To our information, no preceding work has revised the relative between corporate diversification and the worth of corporate cash holdings. However, the worth of cash holdings can be distinct between diversified corporate s and single-segment corporate s. We evolve four vying hypotheses in this paper. First, corporate diversification raises the worth of cash holdings for financially guarded corporate s through an effective interior capital market, because more assets are assigned to the partitions with better buying into possibilities (e.g., Stein, 1997). Second, corporate diversification decreases the worth of cash holdings through bureau problems. For demonstration, corporate diversification can be affiliated with domain construction (e.g., Jensen, 1986) and cross-subsidization (e.g., Shin and Stulz, 1998; Rajan, Servaes and Zingales, 2000).

Thirdly, the value of the cash holdings of financially secures, and if s is smaller companies are diversified, due to the coinsurance of imperfect correlation between cash flows different partitions capacity increased responsibility (eg Lewel, ...