Determinants of Cash Holding In the UK after Financial Crisis
Added on 2023-03-29
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The Determinants of Cash Holding In the UK after Financial
Crisis
1
Crisis
1
Abstract..................................................................................................3
1- Introduction........................................................................................4
Cash holding
theories.............................................................................................
.........5
Cash holding motives..........................
............................................................................7
Problem Statement...............................................................................22
Aims and Objectives.............................................................................18
Structure of the Paper...........................................................................27
2- Literature Review.............................................................................29
3- Methodology....................................................................................38
Sample Selection..................................................................................40
Variable Measurement..........................................................................41
4- Empirical Specification.....................................................................51
Descriptive statistics pre-crisis period (2004-2006).............................53
Regression pre-crisis period..................................................................
....................55
Descriptive statistics during-crisis period.............................................57
Regression during-crisis period............................................................60
Descriptive statistics after-crisis period................................................62
Regression after-crisis period...............................................................63
5- Cash holding overall
pattern.......................................................................................66
2
1- Introduction........................................................................................4
Cash holding
theories.............................................................................................
.........5
Cash holding motives..........................
............................................................................7
Problem Statement...............................................................................22
Aims and Objectives.............................................................................18
Structure of the Paper...........................................................................27
2- Literature Review.............................................................................29
3- Methodology....................................................................................38
Sample Selection..................................................................................40
Variable Measurement..........................................................................41
4- Empirical Specification.....................................................................51
Descriptive statistics pre-crisis period (2004-2006).............................53
Regression pre-crisis period..................................................................
....................55
Descriptive statistics during-crisis period.............................................57
Regression during-crisis period............................................................60
Descriptive statistics after-crisis period................................................62
Regression after-crisis period...............................................................63
5- Cash holding overall
pattern.......................................................................................66
2
6- Overall regression analysis...............................................
..........................................67
7- Conclusion........................................................................................72
References..........................................................................................
................................76
Table of Figures
Table 1. Sample used in the
analysis.............................................................................40
Table 2 prediction of the
correlation............................................................................51
Table3. Summary statistics of period 2004-2006...................
.....................................54
Table 4. Correlation matrix of period 2004-
2006........................................................54
Table5. Estimation result of period 2004-2006..........................
.................................56
Table 6. Summary statistics of period 2007-
2009........................................................57
3
..........................................67
7- Conclusion........................................................................................72
References..........................................................................................
................................76
Table of Figures
Table 1. Sample used in the
analysis.............................................................................40
Table 2 prediction of the
correlation............................................................................51
Table3. Summary statistics of period 2004-2006...................
.....................................54
Table 4. Correlation matrix of period 2004-
2006........................................................54
Table5. Estimation result of period 2004-2006..........................
.................................56
Table 6. Summary statistics of period 2007-
2009........................................................57
3
Table 7. Correlation matrix of period 2007-
2009........................................................59
Table 8. Estimation results for period 2007-2009................................
.......................60
Table 9. Summary statistics of period 2010-
2015........................................................62
Table 10. Correlation matrix of period 2010-
2015.....................................................63
Table 11. Estimation results for period 2010-
2015....................................................64
Table 12. Cash holding
overall......................................................................................66
Appendix 1: DataStream variables
code.......................................................................87
4
2009........................................................59
Table 8. Estimation results for period 2007-2009................................
.......................60
Table 9. Summary statistics of period 2010-
2015........................................................62
Table 10. Correlation matrix of period 2010-
2015.....................................................63
Table 11. Estimation results for period 2010-
2015....................................................64
Table 12. Cash holding
overall......................................................................................66
Appendix 1: DataStream variables
code.......................................................................87
4
The determinants of corporate Cash holding in the UK after
financial crisis
Abstract
Cash holding decision is one of the major choices taken by the
management of the company. The decision not only depends on
academic vision but also the firm' s role in the market and sensitivity to
macro variables. This study aims to determine what variables play
major role in taking cash holding decision by firm. For case purpose we
have considered firms from UK that are listed in FTSE 350. The data set
contains twelve years (2004-2015) data of firm specific variables.
The study time period was divided into three sub periods -before crisis
from 2004 to 2006, the second period is the period from 2007 to2009
and post-crisis period is 2010 -2015. Macroeconomic variables have
not discussed here. The results show there is a positive and significant
relationship between cash holding and net working capital, cash flow
and a negative relationship with leverage and size. The determinants
have different relationships during the three sup-periods.
Keywords: Cash Holdings, Liquidity, Capital structure theories, Firm-
specific variables, Motives
1- Introduction
Liquid assets holding become the prior requirement of UK companies after the
5
financial crisis
Abstract
Cash holding decision is one of the major choices taken by the
management of the company. The decision not only depends on
academic vision but also the firm' s role in the market and sensitivity to
macro variables. This study aims to determine what variables play
major role in taking cash holding decision by firm. For case purpose we
have considered firms from UK that are listed in FTSE 350. The data set
contains twelve years (2004-2015) data of firm specific variables.
The study time period was divided into three sub periods -before crisis
from 2004 to 2006, the second period is the period from 2007 to2009
and post-crisis period is 2010 -2015. Macroeconomic variables have
not discussed here. The results show there is a positive and significant
relationship between cash holding and net working capital, cash flow
and a negative relationship with leverage and size. The determinants
have different relationships during the three sup-periods.
Keywords: Cash Holdings, Liquidity, Capital structure theories, Firm-
specific variables, Motives
1- Introduction
Liquid assets holding become the prior requirement of UK companies after the
5
period of financial crisis. Moreover, due to the financial crisis in the period of 2008 sev-
eral companies were forced to shut down their business operations and functions. On the
other side, other companies that survived during this period are facing difficulty in ob-
taining funds because external financing becomes more expensive. In reference to all
such aspects it becomes vital for the firms to enhance their cash holdings which in turn
helps them in coping up with the liquidity crunch. Hence, after the period of financial cri-
sis, UK firms tend to make more focus on employing conservative financing and low in-
vestment policy. Further, there are mainly three theories that are highly associated with
the determinants of cash holdings namely trade off, pecking order and agency.
From assessment, it has been identified that real GDP growth declined from 3.6%
to 1.3% respectively. Condition of financial crisis has placed high level of impact on the
economic growth as well as development of the companies. With the motive to cope up
with such situation UK business units started to employ the strategy of cash holding. Fur-
ther, tables and graphs depicted below clearly shows that cash holding of companies in-
cluding both financial and non-financial increased significantly. The main motives of UK
firms behind such increasing holding include the aspects like transaction, precautionary,
tax and agency. Thus, the present dissertation will provide deeper insight about the deter-
minants of cash holdings considered by UK firms after the period of financial crisis 2007-
2008.
6
eral companies were forced to shut down their business operations and functions. On the
other side, other companies that survived during this period are facing difficulty in ob-
taining funds because external financing becomes more expensive. In reference to all
such aspects it becomes vital for the firms to enhance their cash holdings which in turn
helps them in coping up with the liquidity crunch. Hence, after the period of financial cri-
sis, UK firms tend to make more focus on employing conservative financing and low in-
vestment policy. Further, there are mainly three theories that are highly associated with
the determinants of cash holdings namely trade off, pecking order and agency.
From assessment, it has been identified that real GDP growth declined from 3.6%
to 1.3% respectively. Condition of financial crisis has placed high level of impact on the
economic growth as well as development of the companies. With the motive to cope up
with such situation UK business units started to employ the strategy of cash holding. Fur-
ther, tables and graphs depicted below clearly shows that cash holding of companies in-
cluding both financial and non-financial increased significantly. The main motives of UK
firms behind such increasing holding include the aspects like transaction, precautionary,
tax and agency. Thus, the present dissertation will provide deeper insight about the deter-
minants of cash holdings considered by UK firms after the period of financial crisis 2007-
2008.
6
(Source: Ons.gov.uk)
Firms use assets, both tangible and intangible and also current and
fixed to generate profits. The level of reliance on different assets de-
pends on industry and firm-oriented characteristics. One of the most
7
Firms use assets, both tangible and intangible and also current and
fixed to generate profits. The level of reliance on different assets de-
pends on industry and firm-oriented characteristics. One of the most
7
controversial issues related to management of assets is the optimal
amount of cash that a firm should hold at any point in time. Cash and
cash equivalents are integral in the ability of a firm to meet its obliga-
tions.There are many definitions for cash holding. According to Gill and
Shah (2012) cash holding is “cash in hand or readily available for in-
vestment in physical assets and to distribute to investors.
According to Peicuti (2014), in addition to the obligations, there are
emergent opportunities in the market that are only available in the
short-run. In some instances, these cash and cash equivalents are
utilised in exploiting opportunities that originate from changes in the
market dynamics, such as investment in physical assets, distribution in
the form of dividends (Gill and Shah, 2011). Cash reserves provide a
valuable source of funds that is used to exploit investment
opportunities (Opler, 1999 and Bates et al., 2009) under two scenarios.
First, when current internally generated cash flows are low or volatile
are insufficient; such resources are deployed towards the most
necessary destinations as indicated by Denis and Sibilkov, (2010). In
this accord, the cash holdings hedge against the financial shocks from
changes in economic projections (Chen and Chang, 2012), and serve
as a tool for solving the challenges facing firms in the form of
unfulfilled expectations (Sufi, 2009). Secondly, the available cash can
be used in mergers and acquisitions. For instance, Harford (1999)
8
amount of cash that a firm should hold at any point in time. Cash and
cash equivalents are integral in the ability of a firm to meet its obliga-
tions.There are many definitions for cash holding. According to Gill and
Shah (2012) cash holding is “cash in hand or readily available for in-
vestment in physical assets and to distribute to investors.
According to Peicuti (2014), in addition to the obligations, there are
emergent opportunities in the market that are only available in the
short-run. In some instances, these cash and cash equivalents are
utilised in exploiting opportunities that originate from changes in the
market dynamics, such as investment in physical assets, distribution in
the form of dividends (Gill and Shah, 2011). Cash reserves provide a
valuable source of funds that is used to exploit investment
opportunities (Opler, 1999 and Bates et al., 2009) under two scenarios.
First, when current internally generated cash flows are low or volatile
are insufficient; such resources are deployed towards the most
necessary destinations as indicated by Denis and Sibilkov, (2010). In
this accord, the cash holdings hedge against the financial shocks from
changes in economic projections (Chen and Chang, 2012), and serve
as a tool for solving the challenges facing firms in the form of
unfulfilled expectations (Sufi, 2009). Secondly, the available cash can
be used in mergers and acquisitions. For instance, Harford (1999)
8
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