International evidence on the non-linear impact of leverage on corporate cash holdings

Guney, Yilmaz; Ozkan, Aydin; Ozkan, Neslihan

Abstract

This paper investigates cash holding behaviour of firms from France, Germany, Japan, the UK and the US using data for 4069 companies over the period 1996–2000. Our focus is particularly on the relation between cash holdings and leverage. We argue that the impact of leverage on cash balances of firms is likely to be non-monotonic. To the extent that leverage of firms acts as a proxy for their ability to issue debt one would expect a negative (substitution effect) relation between leverage and cash holdings. However, as leverage increases firms are likely to accumulate larger cash reserves to minimise the risk of financial distress and costly bankruptcy. Thus, one would expect a positive (precautionary effect) relationship between cash holdings and leverage at high levels of leverage. Our findings provide strong and robust support for a significant non-linear relation between cash holdings and leverage. Additionally, our results show that the impact of leverage on cash holdings partly depends on country-specific characteristics such as the degree of creditor protection, shareholder protection, and ownership concentration.

Citation

Guney, Y., Ozkan, A., & Ozkan, N. (2007). International evidence on the non-linear impact of leverage on corporate cash holdings. Journal of Multinational Financial Management, 17(1), 45-60. https://doi.org/10.1016/j.mulfin.2006.03.003

• Journal Article Type: Article
• Acceptance Date: Mar 19, 2006
• Online Publication Date: May 2, 2006
• Publication Date: 2007-02
• Deposit Date: Feb 13, 2020
• Publicly Available Date: Apr 20, 2020
• Journal: Journal of Multinational Financial Management
• Print ISSN: 1042-444X
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 17
• Issue: 1
• Pages: 45-60
• DOI: https://doi.org/10.1016/j.mulfin.2006.03.003
• Keywords: Cash holdings; Leverage; Investor Protection
• Public URL: https://hull-repository.worktribe.com/output/3428166
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1042444X06000284?via%3Dihub