Cash holdings : motivation, perception and valuation
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The thesis empirically investigates the motivation, perception and value of cash holdings in the UK setting over the period 1980 to 2017. The study is motivated by the marked increase in cash holdings among UK firms, the trend in cash holdings has been subject to media and academic coverage. The research provides an empirical explanation for the upward trend in cash holdings by UK listed companies. In addition, I evaluate how the cash holdings of firms are perceived by the market during corporate investment announcements. The study addresses how cash is valued and in particular, if cash-rich firms outperform cash-poor firms in the stock market and if this effect heightens during periods of high economic uncertainty. The empirical analyses in this study are conducted using a combination of difference in differences (DiD) regression, Two-stage least squares (2SLS) regression, Fama-Macbeth regression and ordinary least squares (OLS) as the estimation techniques. The results indicate that firms increase cash holdings in response to increased competition, the increase in cash holdings is more pronounced among firms exposed to high predatory threat and financing frictions. Furthermore, cash rich firms make gains in the product market at the expense of their rivals. The gains in market share as a result of increased cash holdings is amplified among firms with low exposure to predatory threat and financing frictions. Also, since cash may convey important price sensitive information about the future strategic direction of a firm, I use a sample of 3,251 corporate investment announcements by firms listed on the London Stock Exchange over the period 2005-2016 and demonstrate that higher cash holdings at announcement results in increased market valuation of corporate investments. The relationship between cash holdings and market valuation of corporate investment becomes negative at higher levels of cash holdings. The results also reveal that the positive impact of cash holdings is more noticeable for organic investment announcements, particularly R&D. Lastly, I examine the market performance of a portfolio of abnormally high cash holding firms compared to a portfolio of abnormally low cash holding firms. The results suggest that the portfolio of abnormally high cash holdings outperforms their counterpart. The outperformance increases during periods of increased economic uncertainty. The results of this thesis have important implications for the cash holdings literature, market participants and policymakers. Firstly, the increase in cash holdings indicates limitations in the ease of accessing finance in the capital market. This points to the need to reform the existing opaque capital market to accommodate the needs of disadvantaged companies. Similarly, the increase in cash holdings during periods of increased competition intensity further reinforces the argument of an opaque capital market. It appears that the problem of financial constraint is amplified during periods of increased competition. To mitigate this anomaly, regulators could enact laws that lessen the financing deficit during such periods. Since high cash holdings have an important bearing on a firm’s market performance, shareholders and other stakeholders can pursue activist policies that actively monitor firm cash holdings policies which maximises firm value.