Master 1 Gestion de trésorerie 2022 - Partie 4-2.pdf

Gestion de Trésorerie (Marie-Aude Laguna, 2020) 1 GESTION STRATÉGIQUE DU DISPONIBLE PARTIE 4 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 2 Fait stylisé Augmentation de la part du disponible dans le bilan des sociétés non financières (dépôts court-terme et titres du marché monétaire) aux Etats-Un...

Gestion de Trésorerie (Marie-Aude Laguna, 2020) 1 GESTION STRATÉGIQUE DU DISPONIBLE PARTIE 4 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 2 Fait stylisé Augmentation de la part du disponible dans le bilan des sociétés non financières (dépôts court-terme et titres du marché monétaire) aux Etats-Unis et dans le monde. Phénomène récent? Recrudescence du secteur des services, caractérisé par peu d’investissement et des flux de trésorerie importants. Bulles techs et crises favorisent le motif de précaution. U.S. non-financial corporations are sitting on an aggregate cash and marketable securities position of close to $4 trillion. Source: Faulkender, Hankins, and Petersen (2019) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 3 Evolution du disponible et de l’endettement depuis 1980 Source: Bates, Kahle, and Stulz (2009) Gestion de Trésorerie (Marie-Aude Laguna, 2020) Différences industrielles entre 1990 et 2003 Source: Dittmar and Mahrt-Smith (2007) 4 Gestion de Trésorerie (Marie-Aude Laguna, 2020) COÛTS ET GAINS DU DISPONIBLE Partie 4.1. 5 Gestion de Trésorerie (Marie-Aude Laguna, 2020) Trade-off from the perspective of shareholder wealth maximization 6 The cost of holding liquid assets Lower rate of return of these assets (liquidity premium) Agency costs related to “negative debt”. Si la trésorerie est de la dette négative, alors: Peut-on améliorer la « valeur actionnariale » de l’entreprise en augmentant ou réduisant le niveau de trésorerie? Two main benefits from holding liquid assets Transaction motive by Keynes. The firm saves transaction costs to raise funds and does not have to liquidate assets to make payments Precautionary motive by Keynes The firm can use the liquid assets to finance its activities and investments if other sources of funding are not available or are excessively costly. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 7 Transaction and precautionary motives Under a transactions motive (Keynes 1936; Miller and Orr 1966), firms hold sufficiently high cash balances to avoid the costs of selling noncash assets if faced with an unexpected mismatch between cash inflows and outflows. This view predicts that there are economies of scale in cash management, such that larger firms will have lower cash targets. Under a precautionary motive (Opler et al. 1999), a benefit of cash is avoiding external finance costs when investment opportunities may unexpectedly exceed internal resources. Under this view, cash holdings should be optimally higher for firms with more valuable investment opportunities, with lower expected cash flows, with greater uncertainty, and that are more financially constrained. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 8 Deux principaux conflits d’agence Conflit d’agence entre actionnaires et créanciers (dirigeants rangés du côté des actionnaires) Entreprise est face à des difficultés financières imminentes: valeur marché actif < valeur de remboursement de la dette. Risque de « sur-investissement » et de « sous-investissement » (Jensen and Meckling, 1976, Myers, 1977, and Myers and Majluf, 1984) Risque de liquidation d’actifs Conflit d’agence entre actionnaires et dirigeants (enracinement et pouvoir discrétionnaire des dirigeants). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 9 Agency costs of cash Managers waste corporate resources due to the separation of ownership and control (Jensen and Meckling, 1976): ‘‘Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such companies’’ (Adam Smith) More liquid assets can lead to increased agency problems. Reduces pressures on management to control costs, improve margins, closely monitor employees and operations, and generally enhance profits (Myers and Rajan, 1998). Cash also reduces firm risk. But, this greater preference for cash can lead managers to place too much importance on the precautionary motive for holding cash. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 10 ANNEXE (Neutralité de la structure financière) Proposition 1 de Modigliani et Miller La structure financière n’a aucun impact sur la valeur de marché de l’entreprise en présence de marchés parfaits, à actif/passif donné Démonstration: Rentabilité exigée des capitaux propres incorpore prime de risque proportionnelle au taux d’endettement de l’entreprise Prime imputable à la priorité des créanciers sur les actionnaires. N’est pas imputable au risque de défaillance de l’entreprise Implication majeure: Si la rentabilité des capitaux propres incorpore une prime de risque en cas d’endettement, alors, le coût moyen du capital (pondéré par l’endettement) n’est pas affecté par la structure financière. Et donc: la valeur actionnariale (à cash flow donnés) n’est pas affectée par le niveau d’endettement, puisque actualisée à un même taux (coût moyen du capital) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 11 ANNEXE (Limites du théorème de Modigliani Miller) Déductibilité fiscale des charges d’intérêt favorise l’endettement créateur de valeur. Coûts directs et indirects des difficultés financières augmentent le coût de la dette et diminuent la valeur de marché de l’entreprise. Donc la structure financière a bien un impact sur la valeur, et chaque entreprise doit décider du niveau optimal en fonction de la fiscalité et des coûts attendus d’une défaillance Dimension supplémentaire importante: coûts et gains d’agence de la dette Gestion de Trésorerie (Marie-Aude Laguna, 2020) CASH POLICY / SENSITIVITY (FIRM-SPECIFIC DETERMINANTS) Part 4.2. 12 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 13 Determinants of cash holdings (Opler et al., 1999) Econometric model used to estimate whether precautionary and transaction motives explain cash holdings. Moreover, can be used to measure “excess cash”: the (positive or negative) difference between cash levels predicted by the company characteristics and cash held by the company. Cash holdings decrease significantly with size (greater access to the capital markets), credit ratings (less financial constraints), net working capital (substitution), leverage, whether a firm pays dividends, and whether it is regulated or not. Cash holdings increase significantly with the cash flow-to-assets ratio, the capital expenditures-to-assets ratio, industry volatility, and the R&D-to-sales ratio, strong growth opportunities and riskier cash flows. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 14 Estimated coefficients in Opler et al. (1999) Predicted Cash Ratio = 0.15 MTB – 0.04 Assets + 0.66 CFlows/Assets – 0.97 NetWC/Assets + 0.07 Capex/Assets – 2.8 (LT Debt + ST Debt)/Assets + 0.45 Industrial CFlows Volatility + 1.27 R&D/Sales – 0.10 (If dividend payer) – 0.14 (If regulated). (coefficients estimated in the 1st regression/column model, Tstats are reported in parenthesis) Source: Opler et al. (1999) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 15 THE IMPACT OF NON-NYSE AND NASDAQ FIRMS ON CASH OVER THE 20TH CENTURY Part 4.3. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 16 Sample selection and trends in cash « Extended » sample includes data from regional exchanges. These data allow to examine very small firms throughout the century. Source: Graham and Leary (2018). The difference between average and aggregate trends indicates that the recent growth in the average is driven by small firms with large cash balances relative to book assets. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 17 Secular Increase in cash is more pronounced among smaller firms Source: Graham and Leary (2018) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 18 Main Question Determine whether the substantial shifts in cash holdings over the past century are due to changing cash policies (“cash sensitivities”), changing characteristics of firms, or something beyond firm characteristics. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 19 NYSE vs non-NYSE firms For at least 60 years prior to 1980, non-NYSE and NYSE firms, new entrants and existing firms, and small and large firms had similar cash ratios. From 1920s through the 1960s, only nine out of forty coefficients (“cash sensitivities”) are statistically different between NYSE and non-NYSE firms, compared to 22 out of 32 since the 1970s. For NYSE firms the sensitivities of firm-specific cash holdings to commonly studied variables are stable over near-century of data. Non-NYSE firms: First, it is not the addition of more small firms per se, but rather the changing nature of these new entrants that has affected cash ratios. Second, a shift in the relative sensitivities to firm characteristics accompanies the increase in cash levels. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 20 Steady « cash sensitivities » (NYSE firms) Precautionary motive: Cash ratios are higher for smaller firms, non-dividend payers, and firms with less leverage/access to debt markets (external financing costs), for firms with higher market-to-book ratios (investment opportunities), and firms with more volatile cash flows (uncertainty). Transaction cost motive: Negative relation with firm size and positive relation with cash flow volatility. Substitution between cash holdings and other current assets and to offset current liabilities. Cash holdings are lower for firms with higher recent investment spending Cash holdings (weakly) higher for NYSE firms with higher cash flow, consistent with use of internal funds for investment and accumulation of current cash flows. Source: Graham and Leary (2018) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 21 The impact of smaller firms and new entrants since the 1980s « Extended » sample includes data from regional exchanges. These data allow to examine very small firms throughout the century. Source: Graham and Leary (2018). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 22 « Cash sensitivities » (non-NYSE firms) The coefficients for current assets, short-term and long-term debt become significantly and increasingly more negative for non-NYSE firms after the 1970s. The relation between earnings and cash is always smaller for non-NYSE firms, and becomes statistically lower than that of NYSE firms, only since the 1980s. Source: Graham and Leary (2018) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 23 Cash-sensitivities between non-NYSE vs NYSE firms over the 20th century Source: Graham and Leary (2018). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 24 The « Nasdaq » effect on cash The increase in mean cash from 1980 to 2000 is related to changes in sample composition, and increasing cash ratios among small firms. The increase in mean cash occur because both non-size characteristics and sensitivity to characteristics of IPO firms changed. Entirely consistent with a “Nasdaq effect” in which Nasdaq firms went public with ever-increasing amounts of cash from 1980 to 2000. This Nasdaq effect is stronger for unprofitable, low sales, low current assets, low-debt, high-growth, and high-volatility health and tech firms. Gestion de Trésorerie (Marie-Aude Laguna, 2020) Loss-Making Companies 25 Gestion de Trésorerie (Marie-Aude Laguna, 2020) THE ROLE OF THE MACROECONOMY Part 4.4. 26 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 27 Macroeconomic trends in cash Firm characteristics and cash sensitivities are unable to explain the long-term aggregate trends in corporate cash holdings. Productivity gains and precautionary motives help explain the increase in cash holdings from 1920 to 1945. The decrease cash ratios from 1945 to 1970 is consistent with improving efficiency of cash management. The increase in aggregate cash holdings since 2000 is consistent with increased holdings of cash trapped overseas due to repatriation taxes (Multinational companies, MNCs, see Section 4.5) Two of the most important drivers of average and aggregate cash are current period profitability and current investment (ie, firms build up cash to fund investment). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 28 Macroeconomic determinants (Hypothesis) 1. Liquidity premium and cost-of-carry cash. 2. The precautionary motive (cash sensitivities) to hold cash may be influenced by business-cycle fluctuations, which influence growth opportunities, and uncertainty about economic conditions 3. Finally, variation in tax rates over time may affect the tax cost of holding cash inside the firm. 4. Time-series variation in cash holdings may be driven by contemporaneous cash flow and investment realizations, consistent with the pecking order of Myers and Majluf (1984). Source: Graham and Leary (2018). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 29 Macroeconomic Determinants (Measures #1) 1. Opportunity cost of holding cash: the cost of carry which is the nominal 3-month Treasury-bill rate multiplied by the fraction of corporate cash held in non-interestbearing accounts, and the spread between rates on AAA-rated corporate debt and the 10-year Treasury yield as a measure of the liquidity premium. 2. The standard deviation of market returns and the Economic Policy Uncertainty index of Baker, Bloom, and Davis (2016) to capture aggregate uncertainty. 3. Two measures of aggregate investment opportunities: real GDP growth and aggregate productivity (output-to-capital ratio). A one standard deviation change in aggregate productivity is associated with a 1.7 percentage point (roughly 0.4 standard deviations) change in aggregate cash. The value of growth opportunities or the expected volume of transactions is relevant for aggregate cash holdings, beyond anything captured by firm-level variables, such as the market-to-book ratio and firm size. Source: Graham and Leary (2018). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 30 Macroeconomic Determinants (Measures #2) 4. The domestic corporate tax rate to capture variation in the tax cost of holding cash. 5. Contemporaneous earnings and investment realizations that may push a firm away from its target. The estimated coefficients are highly statistically significant, among the largest of any of the included variables. A a one-standard deviation change in either aggregate investment or earnings is associated with about a quarter standard deviation change in aggregate cash holdings. Source: Graham and Leary (2018). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 31 Aggregate firm characteristics play no role Very little of the large time-series variation in aggregate cash holdings can be explained by changes in aggregate firm characteristics alone. The only variable with a significant coefficient in the expected direction is Current Assets. Panel A includes only the firm-specific target determinants. Panel B adds the macroeconomic variables. Panel C adds contemporaneous cash flow and investment. Source: Graham and Leary (2018). Gestion de Trésorerie (Marie-Aude Laguna, 2020) THE RISE IN FOREIGN CASH Part 4.5. 32 Gestion de Trésorerie (Marie-Aude Laguna, 2020) The rise in foreign cash Source: Faulkender, Hankins, and Petersen (2019). 33 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 34 Domestic versus Foreign Cash The rise in total cash is due almost exclusively to a rise in foreign cash. Domestic cash is explained mainly by precautionary savings variables (or cash sensitivities), while 79% of the increase in foreign cash is explained by the reductions in tax rates that firms face on their foreign income Gestion de Trésorerie (Marie-Aude Laguna, 2020) 35 Cash sensitivities among MNCs The precautionary savings variables have little predictive power in explaining foreign cash positions. Precautionary / Transation motives: Firms with greater access to the capital markets (larger, have a bond rating, higher PPE/book assets and lower market to book ratio) as well as those that invest less and/or return more capital to investors (lower R&D, lower capital expenditure, and higher dividends) hold less cash. Source: Faulkender, Hankins, and Petersen (2019). Gestion de Trésorerie (Marie-Aude Laguna, 2020) Foreign cash and Income shifting Source: Faulkender, Hankins, and Petersen (2019). 36 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 37 Inter-company sales and intangible assets At the end of the 90s, average foreign tax rates began to fall below U.S. tax rates. At the same time, “check-the-box” regulations* allowed firms to shift income into foreign countries (inter-company sales). It explains most of the rise in foreign cash. R&D investments (intellectual property, patents, trademarks, or licensing deals) facilitate related sales to subsidiaries (income shifting) because they can be easily relocated. Overall, 92% of the growth in foreign cash is concentrated in firms with both significant related sales to subsidiaries and intangible assets. And, the rise in foreign cash is concentrated in a small number of low-tax countries. check-the-box” regulations* US owners of foreign subsidiaries benefit from the ability to have foreign subsidiaries treated as disregarded entities by the IRS. Before 1997, if one controlled foreign corporation paid interest to another, that would be immediately taxable under Subpart F rules, at the full tax rate. Gestion de Trésorerie (Marie-Aude Laguna, 2020) Decline in foreign corporate tax rates Source: Faulkender, Hankins, and Petersen (2019). 38 Gestion de Trésorerie (Marie-Aude Laguna, 2020) Cash Ratios across Subsidiary Countries Source: Faulkender, Hankins, and Petersen (2019). 39 Gestion de Trésorerie (Marie-Aude Laguna, 2020) Related Sales in Tax Havens Source: Faulkender, Hankins, and Petersen (2019). 40 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 41 Income Shifting Practices We cannot turn “a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America” (Republican Sen. John McCain at a Senate hearing in 2013). The Senate investigation targeted the country’s tech giants. Their key assets are intangibles like software and patents, which unlike factories can easily be relocated enabling the parent company to claim that its income was earned there. The other method is to set up a global supply chain that involves buying from or selling to subsidiaries in low-tax nations. By pricing the goods or services to favor those affiliates, firms can shrink profit margins at home and inflate them abroad. By law, these “transfer prices” are supposed to be set at a level that an independent supplier would charge. Source: https://www.gsb.stanford.edu/insights/game-global-income-shifting-feds-are-overmatched. Gestion de Trésorerie (Marie-Aude Laguna, 2020) USE AND VALUE OF EXCESS CASH Part 4.6. 42 Gestion de Trésorerie (Marie-Aude Laguna, 2020) 43 Persistence of High and Low Excess Cash Source: Opler et al. (1999). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 44 Does Excess Cash Affect Spending? Methodology The sample includes only firm-year obs. with positive lagged excess cash Firms separated into quartiles on the basis of the market-to-book (MB) ratio Proxy for profitable growth opportunities (~ transaction costs) Agency costs smaller in high-MB firms Two main determinants are considered: Cash and Book-to-Market ratio (on a given year) For instance, firms with a low level of Cash (bottom quartile), but a relatively high Book-to-Market (above-the-median) Source: Opler et al. (1999). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 45 Does Excess Cash Affect Spending? Results Source: Opler et al. (1999). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 46 Does Excess Cash Affect Spending? Results After controlling for the determinants of investment, greater excess cash leads firms to invest more. Holds, irrespective of good investment opportunities or not. However, an increase in excess cash leads to a surprisingly small increase in capital expenditures, acquisitions spending, and payouts to shareholders. Besides, negative excess cash reduces investment more than positive excess cash increases investment (~ financial constraints) Source: Opler et al. (1999). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 47 The Agency Costs of Cash Holdings: Evidence Firms that hold excess cash are more likelty to attempt value-destroying acquisitions of other firms (Harford, 1999). More likely to happen among acquiring firms with more antitakeover provisions (agency problems, less market pressure) (Harford, Mansi, and Maxwell, 2008). Dittmar, Mahrt-Smith, and Servaes (2003) find that corporate cash holdings are greater in countries with weaker investor protections. Gao, Harford, and Li (2013) provide evidence that private firms (subject to fewer agency costs) hold half as much cash as public firms and that poorly governed public firms quickly spend excess cash on excess investment. Source: Harford, Mansi, and Maxwell (2005) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 48 Cash Dissipation and Corporate Governance The market for corporate control is viewed as a strong external force for disciplining management. The « Gompers, Ishii, and Metrick » (GIM) index is a cumulative index of 24 antitakeover governance provisions in a firm’s charter and in the legal code of the state in which the firm is incorporated. Firms that have a high value of the GIM index are thought to have more entrenched management. Alternatively, large shareholders with incentives to monitor management. Sum of all “large” ownership positions (greater than 5%) held by institutional investors (13-F filings by Thomson Financial) Source: Harford, Mansi, and Maxwell (2005) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 49 Cash Dissipation and Corporate Governance Any year a firm has positive excess cash and label this year 0. Poorly governed firms use up over half of these excess cash resources. Source: Harford, Mansi, and Maxwell (2005) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 50 Cash Dissipation and Corporate Governance Focus on firms with low acquisitions (below median) Poorly governed firms dissipate cash more quickly and that this dissipation is not fully due to acquisitions Unreported: The difference in dissipation is not driven by different payout ratios Source: Harford, Mansi, and Maxwell (2005) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 51 Cash Dissipation and Corporate Governance Governance influences the decision to use excess cash; but not to accumulate cash. Literature is divided on how governance affects the level of cash holdings (eg, Dittmar, MahrtSmith, and Servaes, 2003; Harford, Mansi, and Maxwell, 2005). More impact on investment and operating decisions, than on financing policy related to cash. Source: Bates, Kahle, and Stulz (2009). Cash Dissipation and Corporate Governance (sample of firms with excess cash in t. p-values in brackets) Future change in excess cash in t+1 Past change in excess cash in t -1 Source: Dittmar and Mahrt-Smith (2007). Agency Cost of Cash : Bargaining Power with Unions Results Corporate cash holdings are negatively related with unionization. For unionized firms, increases in cash holdings raise the probability of a strike. Unionization decreases the market value of a dollar of cash holdings. Interpretation Lower reported cash holdings improve firms’ bargaining positions against unions, by creating the perception that the firm’s competitive viability is threatened by current economic conditions Previous literature Firms use financial leverage to shelter income from labor unions’ demands (Bronars and Deere, 1991) ; Unionized firms manage their earnings downward prior to labor negotiations (DeAngelo and DeAngelo, 1991) Source: Klasa, Maxwell, Hortiz-Molina (2009) Agency Cost of Cash : Bargaining Power with Unions The effect is more pronounced for firms In more concentrated industries Located in states with no right-to-work legislation* (27 states presently) In industries in which labor costs represent a larger fraction of total costs. Closer to financial distress The effect is less pronounced for dividend-paying firms and firms with easier access to external capital (less credible firms) * right-to-work legislation: Provisions of the Taft-Hartley Act, which prohibit unions from making membership or payment of union dues or fees a condition of employment, either before or after an employee is hired Source: Klasa, Maxwell, Hortiz-Molina (2009) Gestion de Trésorerie (Marie-Aude Laguna, 2020) 55 How to explain the accumulation of excess cash? Firms that end up with excess cash are firms that have done well (external factors, shocks to profitability, competitive pressures, etc.), and firms that end up with low excess cash are firms that have done poorly in the most recent years. Firms that go from the first quartile of excess cash to the fourth quartile experience an average swing in operating cash flow of more than 15% of net assets. However, this dramatic shift in cash flow has a small impact on capital expenditures, acquisitions, and payments to shareholders. In other words, the firms that experience such a large increase in excess cash keep it. Gestion de Trésorerie (Marie-Aude Laguna, 2020) 56 Does a change in cash holdings lead to a change in firm value? Change in firm value: Excess return for firm i during fiscal year t less the return of stock i’s benchmark portfolio during fiscal year t. $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88. Good governance approximately doubles this value Source: Dittmar and Mahrt-Smith (2007). Gestion de Trésorerie (Marie-Aude Laguna, 2020) 57 Does a change in cash holdings lead to a change in operating performance? Methodology Subsample of firms that had positive “excess cash” at time t – 1 and used some of it up in year t. Effect on Industry-adjusted return on assets (ROA). ROA as operating income before depreciation divided by total assets net of cash. Results For firms that use excess cash holdings over the year, a larger beginning balance of excess cash results in lower future operating performance. This negative effect is almost completely reversed if the firm has good external governance. Constrained vs. Unconstrained firms: Measures Dummy variables (Faulkender and Wang, 2005; Almeida, Campello, and Weisbach, 2004) Unconstrained if a Investment grade bond rating exists Unconstrained if the firm has a payout ratio above the median (Fazzari et al., 1988) Constrained firms have a higher value of cash reserves. The value of a dollar of cash continues to be significantly greater for well governed relative to poorly governed firms Source: Almeida, Campello, and Weisbach (2004). Constrained vs. Unconstrained firms: Summary Statistics Source: Almeida, Campello, and Weisbach (2004). Constrained vs. Unconstrained firms: Results For financially constrained firms: A strong positive relation between cash flow and changes in cash holdings (“cash-flow sensitivity of cash”) For an unconstrained firm: No systematic relationship. The firm is indifferent between paying out this dollar to investors and retaining this dollar in the balance sheet as cash Source: Almeida, Campello, and Weisbach (2004). Constrained vs. Unconstrained firms: Macroeconomic Dynamics How do cash policies change in response to events affecting both the firm's ability to generate cash flows as well as the firm financial constraints (e.g, its borrowing capacity)? Financially constrained firms saving an even greater proportion of their cash flows during downturns An increase in the marginal attractiveness of future investments (when compared to current ones) A decline in current income flows Cash flow sensitivities of cash to shocks to aggregate demand should be more countercyclical for financially constrained firms Source: Almeida, Campello, and Weisbach (2004). Constrained vs. Unconstrained firms: Macroeconomic Dynamics Dependent variable : estimated sensitivity of cash holdings to cash flow Regressed on the residual of an autoregression of the log real GDP on three of its own lags (= Unexpected Shocks) Constrained firms save significantly larger fractions of their cash flows following negative shocks Source: Almeida, Campello, and Weisbach (2004). Precautionary Motive: Litigation Risk Question: How the securities litigation environment in the US affects corporate liquidity policy? Unique setting in the US: Security class action lawsuits Total dollar value of lawsuit settlements totaled $9.7 billion in 2005 (Zingales, 2006) Determinants: poor stock performance, high stock volatility, earnings manipulation and disclosure quality, CEO/director incentive compensation mix Hypothesis: firms with higher exposure to litigation risk will hold more cash on their balance sheets in anticipation of future settlement costs. Source: Arena and Julio (2011) Precautionary Motive: Litigation Risk Methodology The sample period is 1996 to 2006 Dependent variable: Ratio of cash and short-term investments to net-of-cash total assets Litigation dummy set equal to 1 in the year of an initiation lawsuit, 0 otherwise Results 5 to 6% more cash on average in the year of an initiation lawsuit, compared to peer firms not affected by a lawsuit Note: Different columns are associated with different control variables (Fixed effects). Source: Arena and Julio (2011) Precautionary Motive: Litigation Risk Cash/(Asset net of Cash) Average effect if Litigation dummy=1 is around 6% 0.06 Average effect if Litigation Dummy=0 is 0! 0 1 Litigation dummy Source: Arena and Julio (2011) Note : Litigation dummy set equal to 1 when the firm on a given year has a lawsuit; 0 otherwise Precautionary Motive: Litigation Risk Methodology Industry membership is based on 4-digit SIC codes The litigation dummy is set equal to one in years when a firm within the same 4-digit SIC industry has a lawsuit initiated against it in that calendar year Firms that are involved in actual litigation events are not included in the sample Results 1.9% more cash on average in comparison with industries not affected by a lawsuit Source: Arena and Julio (2011)