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Financial Crisis and Corporate Cash Holdings: Evidence from East Asian Firms

Financial Crisis and Corporate Cash Holdings: Evidence from East Asian Firms. Discussant I-Ju Chen, Yuan Ze University, Taiwan The NTU International Conference on Finance, 2010. Objectives. Examine the long-term impact of Asian financial crisis on firms’ cash holding policies. 2.

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Financial Crisis and Corporate Cash Holdings: Evidence from East Asian Firms

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  1. Financial Crisis and Corporate Cash Holdings: Evidence from East Asian Firms Discussant I-Ju Chen, Yuan Ze University, Taiwan The NTU International Conference on Finance, 2010

  2. Objectives Examine the long-term impact of Asian financial crisis on firms’ cash holding policies. 2

  3. Theories about firm’s holding excess cash • Transactional cost motive • Precautionary motive • Agency motive The authors specifically investigate the time-series cash holding pattern from precautionary motive perspective.

  4. Findings • A structural change in the time-series of the firms’ cash holdings (CH). • after the financial crisis, the mean ratio increases to 16% in 2006. • Conservative investment policy • Capital expenditure decrease as well as M&A activities • The changes in firm characteristics can not explain the increase of firms’ cash holdings • Overall findings: partially consistent with precautionary motive

  5. General Comments • Well written and affluent paper • Try to complement Bates, Kahle, and Stulz’s (2009, JF) findings: how cash policy change in time-series pattern • changes in risk, net working capital, R&D investment • exogenous shock

  6. Specific Comments - Hypotheses Development • Precautionary motive • holding cash to hedge for future cash shortfalls • firms tend to have large cash holdings when they have higher cost of external finance • Implication for firms’ experiencing exogenous shocks: • Managers are more sensitive to risk • Firms who are more difficult to raise fund will hold more cash • Ex: financial constrained, small, non-dividend pay, or high-leveraged firms • More conservative and hold more cash => Firms change their demand fu. for cash

  7. Specific Comments- Hypotheses Development • Transaction cost motive • Cash payment is cheaper than converting non-cash asset • Large firms hold less cash • Implication for firms’ experiencing exogenous shocks? • Is it possible that firms become more difficult to convert their investment or noncash asset, so holding more cash for transactional needs?

  8. Specific Comments - Hypotheses Development • Agency motive • Holding excess cash for managerial self interests • Data limitation => authors do not test if cash holding policy affected by agency concern after the crisis • Implication for firms’ experiencing exogenous shocks? • Is it possible that firms with worse agency problem hold more cash? (Dittmar, Marht-Smith, and Servaes, 2003; Harford, Mansi, Maxwell, 2006)

  9. Specific Comments - Hypotheses Development • More specific discussions about the relation between the CH and exogenous shocks under each perspective. • unclear prediction about how transaction cost motive to the change in cash holdings • unclear explanation about how agency concern will affect the cash holdings of the firms

  10. Specific Comments • Empirical Findings • Table 2: leverage and equity issuance

  11. Specific Comments • Empirical Findings • Is it possible that firms become more difficult to get external funds either from debt or equity issuance, so holding more cash either for precautionary or transactional needs? • Or, is it possible that the increase in the cash ratio may be the by-product for less liquidity of financial market so firms increase cash holding to offset high transaction costs of their non-cash investment? • Increase in CH may due to TC or PC motives of firms. • Further test about how transaction cost motive affects cash holdings is helpful to differentiate the effect for changes of CH policy.

  12. Specific Comments A significant relation between cash and investment may imply fewer source of funds available after the crisis. However, how can we differentiate its causes? • Empirical Findings • Table 3

  13. Specific Comments • Methodology • why not test the transaction cost motive for cash holding? • why not control for agency issue in the regression models such as table 3 or table 8? • It is not clear how exogenous shock affect the transactional motive of cash holdings? • We also unclear how agency concern affect cash holdings?

  14. ? A + B ? Specific Comments • Methodology • Given that A, B, C may influence Q, it might prelimanary to conclude that change of Q is caused by B without controlling the potential effect of A and C. A + + Q △Q B + C C

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