Corporate Cash Holdings, National Culture, and Multinationality

Abstract

We examine the relations between national cultures, the multinationality of the firm and its holdings of cash. We develop several hypotheses from well known corporate finance theories and theories of the multinational firm, positing that cultural factors as well as the degree of multinationality of firms influence their decisions to hold cash. In particular, firms in countries with high uncertainty avoidance, as a national culture, hold more cash as a way to hedge against undesired states of nature. Furthermore, as a reflection of their longer business cycles, multinational firms typically hold more cash. At the same time, however, the multinationality of the firm moderates the effects of culture on the firm's decision to hold liquid assets. Based on a large panel of firms in forty countries, we present evidence consistent with these hypotheses. While firms in countries with high levels of uncertainty avoidance tend to hold more cash, the degree of multinationality of the firm is positively correlated with holdings of cash. On the other hand, the effect of national culture on firm's cash holdings is lower for multinationals.

A survey of ‘culture and finance'

“…Three papers published in the 'Journal of International Business Studies' and a working paper deal with the cultural antecedents of macro-financial phenomena, including the average corporate capital structure (Chui & Lloyd & Kwok, 2002), national financial architectures (Kwok & Tadesse, 2006), national life insurance consumption (Chui & Kwok, 2008) and corporate cash holdings (Ramirez & Tadesse, 2007) Two papers from the Journal of Auditing and Accounting Research are in the similar vein, and use Hofstede's indices as well. They investigate institutional correlates for the quality of business information, specifically the quality of accounting standards (Kimbro, 2002) and the accuracy of market-analysts' forecasts (Clement & Rees, 2003).…”

“…These research efforts attract attention to the importance of combined methodologies and emphasize the need to propose grounded and applicable conceptual models of culture's consequence in Finance, that include not only frameworks to link culture indices, behaviors and financial outcomes but also methodological refinements including tests for causality, instrumental variable approaches or models of cultural interaction. In particular the two papers by Ramirez & Tadesse (2007) and by Kimbro (2002) emphasize how a culture connection can turn around a previously known relationships between two variables such as between multinationality and precaution cash-holdings (Ramirez & Tadesse) or corruption and individualism (Kimbro). We note that none of these papers referring to the dimensionalist view of culture was published in a financial journal.…”

“…Could social trust and egalitarianism be in some way structurally related? Similarly Ramirez & Tadesse (2007) relate Hofstede's uncertainty avoidance to a number of cultural priors that are common in economics of finance and that could bear a relation to generalized trust.…”

Culture and CEO Compensation

“…Kogut and Singh (1988) find that firms from cultures exhibiting higher Uncertainty Avoidance choose more conservative entry methods when engaging in foreign direct investment. Ramirez and Tadesse (2007) document that firms from cultures with higher Uncertainty Avoidance hold larger cash balances. Kirkman, Lowe, and Gibson (2006) provide an excellent summary of other studies that further demonstrate the empirical validity of Hofstede's UAI.…”

Joint Inventory and Cash Management for Multidivisional Supply Chains

“…These two results suggest that a close inter-departmental collaboration between accounting, finance, and operations is crucial to improve the supply chain efficiency. Second, one important financial decision for a firm is to decide how much cash to hold in order to cope against the volatility of the external environment (Opler et al 1999, Ramirez and Tadesse 2007, Baum et al 2008. In a numerical study, we find that when the demand becomes more variable, the supply chain should simultaneously increase the optimal amount of cash and inventory holdings.…”