CASH HOARDING BY CORPORATIONS HAS RAISED QUESTIONS ABOUT WHETHER HOLDING RESERVES MAKES SENSE OR IMPEDES INVESTMENT. AS PART OF HIS RESEARCH, ASSISTANT PROFESSOR OF FINANCE, BRIAN KIM, EVALUATES THE IMPACT OF FIRM BEHAVIOR AND MARKET VALUATIONS.
Many countries around the world have seen record high corporate cash retention in the recent years. If managers of the companies suffered from more bad memory or bad experiences during financial crisis periods, then they become more conservative about cash policy. We found that firms that were not properly monitored by other monitors like institution investors or by some rules, were more likely to hold more cash,
THE IMPACT OF THE 2014 TAX REFORM IN SOUTH KOREA ON FIRMS' CASH HOLDINGS, REVEALED THAT THE REFORM SPURRED TRADED FIRMS TO INVEST MORE, RAISE WAGES, AND DISTRIBUTE INCREASED DIVIDENDS, SIGNALING A SHIFT FROM EXCESSIVE CASH RETENTION. THE RESULTS SUGGEST REINVESTING IN THEIR BUSINESSES, RESULTING IN HIGHER STOCK PRICES AND OVERALL MARKET VALUATION.
However, an important takeaway for economic policy is that utilizing policy levers to discourage the excessive cash retention can have unintended consequences as well. So we're not saying that every cash saving is bad, some cash saving could be useful, but it is hard to determine whether they're holding right amount of cash.
THE BUSINESS REVIEW IS A PRODUCTION OF LIVINGSTON AND MCKAY AND THE HANKAMER SCHOOL OF BUSINESS AT BAYLOR UNIVERSITY.