The implications of financial conservatism for African firms

The real implications of mimicking peer firms' cash holdings

“…Conversely, firm value is negatively associated with short-term debt (STDA), long-term debt (LTDA) and firm age (AGE). The majority of the coefficients for the control variables align with previous studies (see Chipeta et al. , 2021; Fauver et al.…”

“…Interestingly, the benefits of mimicking, as shown by the positive association between the instrumented peer firms' cash holdings and firm value, are more pronounced when a firm mimic decreases relative to increases in peer firms' cash holdings. This asymmetry suggests that investors view hoarding cash less favourably as it entails curtailing and postponing investments (Chipeta et al. , 2021).…”

“…, 2019), mimicking peer firms neutralises competitive aggressiveness. Hoarding cash also enhances financial flexibility or the ability to fund future investments from internal sources (Chipeta et al. , 2021).…”

“…, 1998; Nason and Patel, 2016). Such divergence increases the opportunity costs of holding cash as managers pass up value-enhancing investment opportunities (Chipeta et al. , 2021) or expose firms to bankruptcy, especially when the supply of credit contracts and the firm has excessively low cash reserves (Cui et al.…”

“…In the case of cash holdings, which are a more convenient internal source of capital and hedge against contractions in credit supply (Chen et al, 2019), mimicking peer firms neutralises competitive aggressiveness. Hoarding cash also enhances financial flexibility or the ability to fund future investments from internal sources (Chipeta et al, 2021). These critical roles of cash have recently been emphasised in the literature against a backdrop of the surge in corporate cash holdings, especially as economies transition from tangible (physical) to intangible capital, primarily financed from internal sources [3].…”