Financial Crisis and Corporate Cash Holdings: Evidence from East Asian Firms

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Financial Crisis and Corporate Cash Holdings: Evidence from East Asian Firms

DiscussantI-Ju Chen,

Yuan Ze University, Taiwan

The NTU International Conference on Finance, 2010

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Objectives

Examine the long-term impact of Asian financial crisis on firms’ cash holding policies.

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Theories about firm’s holding excess cash

Transactional cost motivePrecautionary motiveAgency motive

The authors specifically investigate the time-series cash holding pattern from precautionary motive perspective.

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Findings A structural change in the time-series of the firms’ cash

holdings (CH). after the financial crisis, the mean ratio increases to

16% in 2006. Conservative investment policy

Capital expenditure decrease as well as M&A activities

The changes in firm characteristics can not explain the increase of firms’ cash holdings

Overall findings: partially consistent with precautionary motive

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General Comments

Well written and affluent paperTry to complement Bates, Kahle, and

Stulz’s (2009, JF) findings: how cash policy change in time-series pattern changes in risk, net working capital, R&D

investment exogenous shock

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Specific Comments - Hypotheses Development

Precautionary motive holding cash to hedge for future cash shortfalls firms tend to have large cash holdings when they

have higher cost of external finance Implication for firms’ experiencing exogenous shocks:

Managers are more sensitive to risk Firms who are more difficult to raise fund will hold more cash

Ex: financial constrained, small, non-dividend pay, or high-leveraged firms

More conservative and hold more cash => Firms change their demand fu. for cash

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Specific Comments- Hypotheses Development

Transaction cost motive Cash payment is cheaper than converting

non-cash asset Large firms hold less cash Implication for firms’ experiencing exogenous

shocks? Is it possible that firms become more difficult to

convert their investment or noncash asset, so holding more cash for transactional needs?

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Specific Comments - Hypotheses Development

Agency motiveHolding excess cash for managerial self interests Data limitation => authors do not test if cash holding

policy affected by agency concern after the crisis Implication for firms’ experiencing exogenous

shocks? Is it possible that firms with worse agency problem hold

more cash? (Dittmar, Marht-Smith, and Servaes, 2003; Harford, Mansi, Maxwell, 2006)

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Specific Comments - Hypotheses Development

More specific discussions about the relation between the CH and exogenous shocks under each perspective. unclear prediction about how transaction cost

motive to the change in cash holdings unclear explanation about how agency

concern will affect the cash holdings of the firms

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Specific Comments Empirical Findings

Table 2: leverage and equity issuance

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Specific Comments Empirical Findings

Is it possible that firms become more difficult to get external funds either from debt or equity issuance, so holding more cash either for precautionary or transactional needs?

Or, is it possible that the increase in the cash ratio may be the by-product for less liquidity of financial market so firms increase cash holding to offset high transaction costs of their non-cash investment? Increase in CH may due to TC or PC motives of firms.Further test about how transaction cost motive affects cash

holdings is helpful to differentiate the effect for changes of CH policy.

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Specific Comments Empirical Findings

Table 3

A significant relation between cash and investment may imply fewer source of funds available after the crisis. However, how can we differentiate its causes?

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Specific Comments

Methodology why not test the transaction cost motive for

cash holding? why not control for agency issue in the

regression models such as table 3 or table 8?It is not clear how exogenous shock affect the

transactional motive of cash holdings?We also unclear how agency concern affect cash

holdings?

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Specific Comments

Methodology Given that A, B, C may influence Q, it might

prelimanary to conclude that change of Q is caused by B without controlling the potential effect of A and C.

B

C

Q

A

△Q B+

C

+

+

+

A?

?