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Review of Quantitative Finance and Accounting

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08-05-2020 | Original Research

Firms cash management, adjustment cost and its impact on firms’ speed of adjustment: a cross country analysis

Authors: Qazi Awais Amin, Tom Williamson

Published in: Review of Quantitative Finance and Accounting | Issue 1/2021

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Abstract

We investigate the firms’ specific attributes that determine the difference in speed of adjustment (SOA) towards the cash holdings target in the Scandinavian countries: Denmark, Norway and Sweden. We examine whether Scandinavian firms maintain an optimal level of cash holdings and determine if the active cash holdings management is associated with the firms’ higher SOA and lower adjustment costs. Our findings substantiate that a higher level of off-target cost induces professional managers to rebalance their cash level towards the optimal balance of cash holdings. Our results reveal that Scandinavian firms accelerate SOA towards cash targets primarily for the precautionary motive. Moreover, our results show that SOA is heterogeneous across Scandinavian firms based on adjustment cost and deviate cash holdings towards the target mainly with the support of internal financing. Furthermore, our empirical findings show that the SOA of Norwegian firms is significantly higher than the Danish and Swedish firms.

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We categorise firms as financially constrained (FC) and unconstrained (UC) if they are below (above) of industry median in term of total assets for firm size criteria, and take 1 if firms pay the dividend, and 0 otherwise. For growth and interest coverage ratio criteria, sample firms are classified as FC and UC if firms are above (below) of industry median of sample firms. Based on these classifications, the non-dividend paying firms, small size firms, low growth firms, and low-interest coverage ratio firms are categorised as FC firms otherwise, UC firms. For growth criteria, firms’ growth defines as an increase in the firm’s annual sale compares to the preceding year. Previous studies such as Han and Qiu (2007) use ‘Bond rating’ and ‘CP rating’ while Almeida et al. (2004) use paper rating to classify firms as financially constrained and unconstrained firms. We ignore these criteria because of data limitations.

The coefficient on λ captures the magnitude of the difference between target and actual cash levels that typical firms generally close each year. Following prior studies, we determine SOA (λ) by subtracting the estimated coefficient (δ0) on the lagged cash holdings from 1 (e.g., 1 − δ0). Moreover, the estimates of SOA are explained in terms of the half-life period which is defined as the time required to cover half of the distance from opening balance of cash to the target level.

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Title: Firms cash management, adjustment cost and its impact on firms’ speed of adjustment: a cross country analysis
Authors: Qazi Awais Amin
Tom Williamson
Publication date: 08-05-2020
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 1/2021
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-020-00886-w

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