Firm diversification and the value of corporate cash holdings

Tong, Zhenxu

doi:10.1016/j.jcorpfin.2009.05.001

Cited by 153 publications

(90 citation statements)

References 35 publications

(36 reference statements)

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“…They extend the framework proposed by Opler et al (1999) to include uncertainty arising from volatility in investment opportunities across divisions and find evidence that the coinsurance benefit of internal capital markets reduces the need to hold precautionary cash. In a similar paper, Subramaniam et al (2011) attribute the lower cash holdings of diversified firms to the complementarity in growth opportunities across the different segments while Tong (2011) associates diversification with lower values of cash.…”

Section: Cash Holdings and Internal Capital Marketsmentioning

confidence: 99%

Corporate cash holdings: Causes and consequences

Amess

Banerji

Lampousis

2015

International Review of Financial Analysis

127

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The considerable growth in corporate cash holdings around the world has prompted scholarly interest. Consequently, there is now a large academic literature examining cash holdings and their impact on corporate outcomes and firm values. This article reviews and synthesizes the literature to offer insight into two primary motives to hold cash: precautionary and agency. We first present a stylized model that explores the trade-off in holding cash between these two motives and then examine empirical studies to determine how existing theories are supported by evidence using data from a variety of countries. In addition, we examine the effectiveness of a variety of corporate governance devices in curtailing cash holdings and also the extent to which these devices offer investors' confidence that cash will not be wasted. Finally, we discuss methodological and measurement issues associated with empirical cash holdings studies. JEL classification: G30; G32

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Section: Cash Holdings and Internal Capital Marketsmentioning

confidence: 99%

Corporate cash holdings: Causes and consequences

Amess

Banerji

Lampousis

2015

International Review of Financial Analysis

127

View full text Add to dashboard Cite

show abstract

“…The allegedly beneficial or detrimental effects of diversification on the value of the firm have remained in the core of the business research for long time (Tong, 2011). Recent literature on corporate governance and finance has underlined the effect of corporate ownership, showing that the corporate diversification discount is more pronounced among firms with low managerial ownership and controlled by dominant shareholders (Aggarwal and Samwick, 2003;Laeven and Levine, 2007).…”

Section: Introductionmentioning

confidence: 99%

Diversification and control in emerging markets: The case of Chilean firms

Jara-Bertin¹,

López‐Iturriaga²,

Espinosa³

2015

BRQ Business Research Quarterly

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Articulo de publicación ISIWe analyze the effect of two types of corporate diversification (business diversification and ownership diversification) on the market value of the Chilean firms. For a sample of 83 nonfinancial firms listed on the Santiago Stock Market from 2005 to 2013, we find a discount for both business and ownership diversification, which is consistent with that reported for other economic or institutional settings. Second, we find that the business diversification discount is related to the ownership structure and is due to the excess of the largest shareholders’ control rights. Third, we find that the ownership diversification discount becomes a premium when the ownership diversification enables the control of the affiliated firms. This effect can be explained by the improvement of internal capital markets that allows overcoming the limitations of Chilean external capital marketsChilean Fondecyt Grant 11110021 Spanish Ministry of Science and Innovation ECO2011-29144-C03-0

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“…Such characteristics are likely to influence the marginal value of cash holdings to the shareholders. This measure has recently received the attention of researchers (Faulkender and Wang, 2006;Pinkowitz et al 2006;Dittmar and Mahrt-Smith, 2007;Pinkowitz and Williamson, 2007;Drobetz et al 2010;Tong, 2011). According to the free cash flow theory, agency problems reduce the marginal value of a firm"s cash holdings (Dittmar and Mahrt-Smith, 2007).…”

Section: Introductionmentioning

confidence: 99%

Does Cash Contribute to Value? A Comparison of Constrained and Unconstrained Firms in China and Germany

Zhang

Eije²,

Westerman³

2015

EJEF

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A fundamental characteristic of emerging markets is the underdevelopment of legal institutions and financial markets. Therefore, the marginal value of a firm"s cash holdings in emerging countries can be lower than 1, due to high agency costs resulting from poor external corporate governance. However, the marginal value of cash may also be high in emerging markets because the information asymmetry between current and new providers of funds is high, which means that it is difficult to access the (low quality) capital markets. We study for the industrialized countries of China and Germany whether corporate cash holdings contribute to shareholder value in both constrained and unconstrained firms. In contradiction to previous literature on emerging markets, we find that the marginal value of cash is not smaller than 1 in China, so that agency costs do not dominate. We, however, find marginal values of cash lower than 1 for unconstrained firms in both countries, implying that in these firms agency costs of cash holdings exist. For constrained firms we find marginal values significantly larger than 1 in both countries. This indicates difficulties in accessing the financial markets for these firms. These difficulties prove to be larger in China than in Germany for small and service firms, but not for high growth firms.

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Firm diversification and the value of corporate cash holdings

Cited by 153 publications

References 35 publications

Corporate cash holdings: Causes and consequences

Corporate cash holdings: Causes and consequences

Diversification and control in emerging markets: The case of Chilean firms

Does Cash Contribute to Value? A Comparison of Constrained and Unconstrained Firms in China and Germany

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