Why Do Mutual Funds Hold Cash?

Chaderina, Maria; Scheuch, Christoph

doi:10.2139/ssrn.3075091

Cited by 2 publications

(12 citation statements)

References 14 publications

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“…Redemption is measured as log of the amount redeemed ( LnRed ) in a particular year. Choi and Shin (2016) and Chaderina and Scheuch (2018) argued that mutual funds hold more cash at the cost of performance to adjust redemptions.…”

Section: Data Description and Methodologymentioning

confidence: 99%

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Cash holding and performance analysis of mutual funds: a case of an emerging financial market

Khan

Shah

Bangash

2021

IJOEM

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PurposeThis study is about the determinants of cash holding and impact of cash holding on mutual funds’ performance. In addition, the study analyzes the impact of performance-related determinants of cash holding on funds' performance.Design/methodology/approachPanel data of ten years of 190 open-end mutual funds are analyzed through fixed effect regression technique. The risk-adjusted funds' performance of cash based portfolios is computed through capital asset pricing model (CAPM) (1964), Fama and French (1993) and Carhart (1997) models.FindingsThe results indicate that small size funds, high charging front-end load funds, high turnover ratio funds, high 12-month fund returns run up, high dividend paying funds and high redemption level funds hold more cash for precautionary purpose to avoid costs of cash short-falls. Further, monthly average raw returns and risk-adjusted performance of funds with the lowest raw and residual cash holding are found higher than the funds with the highest cash holding. An increase in cash is found to dilute performance.Originality/valueThis is a pioneer study in a corporate environment with shallow capital market, reliance of businesses on bank credit, firms exposed to agency issues, wealth expropriations and existence of business groups with political linkages but with opportunities of investments due to expected favorable geo-socio-political situation. The study generates outcomes relevant for other similar economies.

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Section: Data Description and Methodologymentioning

confidence: 99%

“…, 2009; Palazzo, 2009; Gao and Grinstein, 2014). For example, the redemption [1] feature of an open-end mutual fund is said forcing managers to hold cash to meet any unexpected cash withdrawal by an investor to avoid selling the assets (Chaderina and Scheuch, 2018; Choi and Shin, 2016; Morris et al. , 2017).…”

Section: Introductionmentioning

confidence: 99%

Cash holding and performance analysis of mutual funds: a case of an emerging financial market

Khan

Shah

Bangash

2021

IJOEM

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“…However, low abnormal cash holding funds lack the flexibility to compensate for capital outflows and may suffer costly fire sales. Chaderina and Scheuch (2018) show that mutual funds hold a large amount of cash to meet the needs of cash inflows and outflows, but they are used to conducting transactions in essential portfolio assets. In particular, the phenomenon of inferior fund liquidity and low market liquidity is even more significant.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Sherrill, Shirley, and Stark (2017) show that their sample funds also exhibit worse market timing and hold more cash. Chaderina and Scheuch (2018) present that redemptions following bad performance pose no dilution risk to the remaining investors, and what appears to be liquidity management by the funds is actually managers collecting rent. Accommodating redemptions with cash only, as managers with performance‐sensitive compensation do, amplifies outflows and destabilizes the fund.…”

Section: Literature Reviewmentioning

confidence: 99%

“…It also shows that due to the large amounts of outflow from the fund, managers can also get paid based on the performance achieved. Chaderina and Scheuch (2018) present that poor performance is terrible for managers and reduces the optimal fund scale. It is thus sufficient to liquidate illiquid assets to meet performance‐driven redemptions.…”

Section: Literature Reviewmentioning

confidence: 99%

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Regime switching dynamics in mutual fund cash holdings, risk, and size threshold effect

Lee

2020

Int. J Fin Econ

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This paper examines the relationships among cash holdings, fund risk, fund turnover, and market risk for equity funds over the period 2007–2017 under the scale effect threshold. From the empirical results of the panel smooth transition regression (PSTR) model, cash holdings and scale effect in equity funds are indeed non‐linear relationship. The findings show that the relationships among cash holdings, fund risk, fund turnover, and market risk differ widely based on taking into account the scale effect.

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Why Do Mutual Funds Hold Cash?

Cited by 2 publications

References 14 publications

Cash holding and performance analysis of mutual funds: a case of an emerging financial market

Cash holding and performance analysis of mutual funds: a case of an emerging financial market

Regime switching dynamics in mutual fund cash holdings, risk, and size threshold effect

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