Cash Piles Alongside Stockpiles Of Shares Repurchases

Evolution of Cash Holdings of US Companies

Discuss about Cash Piles Alongside Stockpiles of Shares Repurchasesthe .

Substantial attention of media has been dedicated to the rise in cash holdings among the companies in the United States. A record level has been hit by cash piles alongside stockpiles of shares repurchases at the large United States firms. The investigators in this present article have devoted their time and energy to probe the evolution of cash holdings of the United States companies’ right from year 1980 and to showcase the possibility of such evolution being explicated on the basis of alterations in conventional cash holdings’ determinants (Bates, Kahle & Stulz, 2009).

The investigators sought out to accomplish these objective by documenting a secular upsurge in cash holdings of characteristic companies in the United States between 1980 and 2006. The scholars utilized a regression of average cash to assets ratio on time and constant to showcase that time had a significant non-negative coefficient. The insinuation of this revelation is that average cash to assets ratio has escalated by 0.46 percent annually (Bates, Kahle & Stulz, 2009). The authors also manifested this evolution by showing that the cash ratio has exceedingly doubled between 1980 (10.5 percent) and 2006 (23.2 percent).

It was hence essential to probe whether the sudden upsurge in cash holdings arises from urgency problems, denotes an irregularity that disapproves the prevailing corporate cash holdings determinant theories or emerges from alterations in characteristics of companies alongside business environments of firms.

The mean cash to assets ratio for the industrial companies in the United States have exceedingly doubled between the years 1980 and 2006. The economic significance measure of such an upsurge is that the average company at the end of 2006 is able to retire every debt obligations with holdings in cash. The ratios of cash rise was a result of the cash flow of companies becoming riskier. It also arose due to the companies change:

These firms held less stock alongside receivables with increased research and development activities. The precautionary motive for holding cash has a key role to play when explicating the upsurge in ratios of cash. However, the authors of this article discovered no consistent proof relating agency conflicts to the rise in these ratios. It was concluded that many US firms hold cash for forestalling distress as well as default (Bates, Kahle & Stulz, 2009).

The authors documented the sudden upsurge between 1980 and 2006 in the mean cash ratios for the firms in the United States. It was shown that the surge was more pronounced among companies which do make dividend payments, those in more latest initial public offers listing groups alongside companies in industries which undergo highest rise in volatility of idiosyncratic.

Factors Contributing to the Rise in Cash Holdings

Upon documenting the the rise in holdings of cash, it was deducted that the primary reasons for the upsurge in cash ratio  are the fallen stock, increased risk for firms cash flow, fallen capital spending alongside increased research and development spending. It was noted that the alterations in the above mentioned variables differ with respect to the overal rise in cash holdings crossways optional empirical models of holdings of cash. Nevertheless, the conclusions by the authors remained robust.

The authors noted that the rise in cash flow holdings was linked to the vastly examined rise in risk of idiosyncratic. Latest evidence of a declining risk of idiosyncratic could make firms to ultimately decrease their respective cash holdings if the increase is sustained. Such will give a convincing explanation for the peaking cash ration in the year 2004 in the author’s sample.  

The authors also concluded that the rise in stock was to probably be prolonged. The authors also noted that the higher significance of research and development with respect to capital spending had a lasting impact on these cash ratios. Authors also discovered that the investment opportunities for research and development remained expensive to finance compared to capital utilizing capital spending. Intensity of greater research and development accordingly in relation to capital spending needed companies to hold a higher cash holdings vis-à-vis upcoming shocks to cash flows produced internally.

The authors gave evidence showing that the rise in ratios of cash could significantly be explicated by the firms’ features alterations over the used sample and less explained substantially by alterations with respect to the link between characteristics of firms and holdings of cash. The proof given by the authors aligned with prevailing evidence indicating that it is critical to hold cash as a precautionary motive which is a key determinant of the demand for cash.

Even though derivative markets has expanded suddenly, the proof given by authors show that companies are faced with diverse risks beyond hedging or hesitant to hedge with derivatives. The authors acknowledged a significant variation across cash holdings that is never explained by the underlying model used in the study.  Nevertheless, the agency problem had no capability of explicating the author’s evidence aggregately.  The authors particularly held that no evidence existed to show that ratios of cash increase abundantly for companies with increasingly pronounced management or that cash falls values during the period between 1980 and 2006. 

The Main Hypotheses

The authors further recorded the sudden decline in the United States companies’ net debt between 1980 and 2006. The authors held that in case cash was barely negative debt that it is appropriate to measure it via net debt. They acknowledge the gap in the finance literature which negates the spectacular evolution in net debt of the firms in the United States with respect to the conventional leverage measures.

The authors showed that by the year 2006, average companies lacked leverage in case it was measured based on net debt. The authors concluded that the growing significance of cash has to be considered during the evaluation of the financial situation as well as in the assessment of decisions of capital structure by companies. The main research question being addressed in this article is ‘why do firms in the United States hold extremely large cash currently compared to the initial periods?”

The authors held various hypothesis in the study:  that the increase in cash holdings was more pronounced among companies which do make dividend payments, those in increasingly latest initial public offers listing groups alongside companies in industries which undergo highest rise in volatility of idiosyncratic. Ceteris Paribus, urgency problems-stricken firms are expected to hold cash in case they lack good opportunities for investing and where their respective management do not wish to give back shareholders their cash. 

The authors use literature review to get the required data for the investigations and applied various models to affirm the hypothesis. The authors used review of literature method by reviewing evidence and theory to identify the four motives of holding cash among firms as transaction, precautionary, urgency as well as tax motives.  

Authors affirmed that firm characteristics changes as the reason for increase in cash ratios using a modified type of OPSW model for 1980s utilizing Fama-MachBeth regressions. They attained the coefficient of these model that denoted the mean coefficients from yearly cross-sectional regressions they estimated between 1980 and 1989. The modified OPSW model took into account the net debt alongside net equity that were not captured by other previously used models in the study. 

The authors also applied the regression models to ascertain whether there was a change in demand functions for the cash holdings. The authors commenced this investigation from regressions that linked cash ratio to changes in firm characteristics over time. The investigators then advanced to probe whether such regressions could explicate the rise in cash ratios via alterations in features of the companies. The main focus was to ascertain whether a regime shift existed with respect to how companies determine respective cash holdings.  

Literature Review and Models Applied

The authors found out that the main reason for the increase in the cash ratios were the alterations in the characteristics of firms. The authors attached the rise in cash holdings to the alterations in particular features of the specific companies. The authors found out that there were changes in the demand curve for cash holdings from 2000 due to the changes in the characteristics of firms. They noted that the coefficients of the size of the firm shifted from non-positive and significant in 1980s and 1990s to non-negative and significant in early 2000s. This indicates that the latter outcomes are likely manifestations of the upsurge in cash holdings of enormous companies beginning in 2000.  

The authors also found out the pervasiveness of the cash holdings’ increment. They gave a table indicating the secular rise in average cash ratio alongside the conforming decline in net debt. They discovered that net debt declined as a result of increased cash holdings by firms instead of firms having reduced debt. They discovered that there was a positive relationship between increase in cash holdings and the size of the firm by sub diving firms into quintiles every year in accordance with book value of respective firms’ assets at the elapse of previous year.

It was discovered that mean cash ratios escalated for company size quintiles between 1980 and 2000 and concluded that mean cash ratio surges crossways individual quintiles but it was more exposed in smaller firms. They also discovered that larger firms showcased enormous increases in cash holdings in later periods.    Authors also  found out four motives of holding cash among firms as transaction, precautionary, urgency as well as tax motives but narrowed down to precautionary motive manifested through secular  upsurge in idiosyncratic risk as the main reason behind the increase in cash holdings by the United States firms. 

The main result found by the authors is that precautionary motive manifested through secular upsurge in idiosyncratic risk is the main reason for the increased cash holdings among the United States firms but urgency conflict had no consequences in the increase in cash holdings.

The result showed that there was a change in cash holding demand (precautionary) function. The relations between firm characteristics and cash holding remained consistent generally crossways the models estimated with exclusion of coefficient on capital spending that differed with cash ratio’s constructions (Bates, Kahle & Stulz, 2009). When the indicator variables that permitted the alteration in intercept was incorporated in the 1990s and 2000s, it was discovered that the intercept did not rise in the 1990s while the 2000s’ intercept was no longer bigger than that of 1980s for Model 4, yet greater for Model six and five. Model 6 and 5 never permitted the exclusion of possibility that a shift in regime explicated the 2000s’ higher cash holdings (Bates, Kahle & Stulz, 2009).

Conclusion

The results from the 3^rd model documented in Panel B that utilized log of ratio of cash to net assets as dependent variable showed that the 2000s intercept coefficient remained non-negative. This suggested an outward shift in the demand curve for the cash that was nor explicated by the alterations in characteristic of the firm (Bates, Kahle & Stulz, 2009).

Nevertheless, when the shifts in slopes is permitted, the same result no longer hold. Both the indicator variables remained non-positive, yet none of them is significant ate five percent level (Bates, Kahle & Stulz, 2009).  The results also indicated that the intercept declined during the 1990s and subsequently surged during the 2000s, hence during the 2000s, the intercept was the same as during the 1980s. Accordingly, a rise in the intercept could not explicate the greater cash ratios during the 2000a contrasted with the 1980s (Bates, Kahle & Stulz, 2009).

Numerous significant findings drawn from regression. The Panel B models suggested that cash holdings remained lower than anticipated during the 1990s (Bates, Kahle & Stulz, 2009). There was no evidence in Panel B indicating that, provided the characteristics, firms had larger than anticipated cash holdings during the 2000s because of the non-positive interactions for intercepts (Bates, Kahle & Stulz, 2009). The results also showed that permitting for time variations in coefficients added little to the power of explanatory of regressions. It was also discovered that non-positive relations between firm size and cash holding breaks down during 2000s (Bates, Kahle & Stulz, 2009).  

The additional examinations of alterations in intercepts as well as slope were performed cross-sectional for individual year (Bates, Kahle & Stulz, 2009). The evaluation affirmed the outcomes of the regression indicating a fall in the intercept over time. The explanatory variables interestingly explicate additional of cross-sectional cash holding distribution (Bates, Kahle & Stulz, 2009).  The two coefficients’ evolution remained interesting in this study: The coefficient of the cash flow risks tends to be insignificant during the early years of sample period, whereas the coefficient of the firm size switched from non-positive and significant in 1980s and 1990s to non-negative and significant in the early 2000s. The latter outcomes most probably manifests the surge in cash holdings of the big firms beginning in 2000 (Bates, Kahle & Stulz, 2009).  

The rise in cash holdings documented by investigators in this article has significant implications in my understanding of the United States companies’ leverage. A great proportion of finance literature have sought to measure leverage based on debt ratio to assets or based on debt to equity. Based on this definitions, however, slight evidence exist relating to a decline in mean leverage for companies. It has shown that the drop in net debt is extremely sharp that mean net debt among United States companies is non-positive as reflected between 2004 and 2006.

This study is significant since it incorporates the evolution of net debt and uses it to recognize a sharp different deduction regarding present leverage level among the United States companies alongside the leverage evolution over the previous twenty-five years. It has made me to understand that cash holdings increase prominently among firms that fail to make their dividend payments dramatically. It has also made me disprove the notion that upsurge in cash holdings can be ascribed systematically to agency problems in companies.  

The paper majorly used secondary data and this could have led to forwarding mistakes made by the previous scholars. They could have used both primary and secondary research methods to collected more diverse data which could have boosted the reliability and credibility. Moreover, the principles of triangulation was missing as the data was narrowed down biasedly for the United States firms. A cross-sectional data could have given a more reliable and credible results that could have enabled generalization (Bates, Kahle & Stulz, 2009). The sample size was also small as the models used limited certain amount of data leading to increase in probability of error.  

The main thing that can be learned from this is that it is more appealing and accurate to have both theoretical and empirical data when undertaking analysis. As presented in the article, both theoretical and empirical analysis were done hence disapproving the notion that urgency problems leads to increased cash holdings as has been theoretically conceived initially.

References

Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do US firms hold so much more cash than they used to?. The journal of finance, 64(5), 1985-2021.