Abstract
Corporate cash holdings have become a global phenomenon in the past two decades with many globally renowned corporates reportedly holding record cash holdings. Many studies have investigated the motives behind these cash holdings while lobbyists have called on governments to liberate these trapped liquid resources. This is mainly because rising corporate cash reserves have coincided with low levels of investment with adverse effects on economic growth, employment opportunities and infrastructural development. Most corporate cash holdings studies have focused on the determinants of cash holding levels of firms in the United States of America (US) and other developed countries. However, the findings of these studies are not easily generalisable to emerging economies that have different institutional and macroeconomic conditions.
This study was motivated by the realisation that South African firms hold more cash holdings than US and European firms. Moreover, the level of corporate investment has dropped significantly, forcing the sitting President, Cyril Ramaphosa to hold annual investment conferences to rally corporates to invest in the domestic economy. The consequences of the low levels of investment in South Africa have been high unemployment, increased social and political instability and low economic growth. Previous studies have investigated the firm characteristics that drive corporate cash holdings. However, as these factors have not been able to fully explain cash holdings as shown by the different results obtained in developed and emerging economies. Against this backcloth, this thesis examines the firm specific, institutional, and macroeconomic determinants of cash holdings by Johannesburg Stock Exchange (JSE) listed non-financial firms.
To fully comprehend why South African firms hold so much cash, this study investigated how corporate cash holdings impact firm value. The thesis tests whether firms have optimum cash holding levels, how fast they adjust any deviations from their target levels, and the factors that affect the speed of adjustment. The role of managerial ability in determining corporate cash holding dynamics was also
iv
investigated. Past studies have tended to ignore the influence of idiosyncratic managerial attributes such as ability in driving cash holdings.
This study adopted a quantitative research approach to investigate the factors that influence corporate cash holding levels, firm value, and cash holdings speed of adjustment. The sample study consisted of JSE-listed non-financial firms with observations made from the year 2000 to 2020. The dynamic system-GMM estimator is used because of its superiority and reliability over static estimators such as fixed effects and random effects estimators, which were retained for robustness testing. Firm level data were obtained from IRESS database while institutional and macroeconomic factors were gathered from the World Bank, Federal Reserve Economic Data, and Business Economic Research (BER).
The study confirms firm characteristics significantly determine corporate cash holding levels. Firm size, leverage, liquid assets, capital expenditure, and investment opportunities have a negative influence on cash levels, while cash flow and dividends exert a positive influence on cash holdings. While the findings, consistent with previous studies, show that the trade-off, financial hierarchy, and agency theories largely explain cash piles held by firms, this study further found evidence that only the shareholder power theory explains the influence of capital expenditure, investment opportunities, and dividends with corporate cash holdings.
Cash holding levels are also driven by non-firm specific factors. This study found that the institutional environment strongly determines corporate cash holdings. Specifically, corruption, political stability, shareholder rights protection, and creditor rights protection all impact amount of cash reserves. At the macro level, this study found that business confidence and economic growth both share an inverse relationship with corporate cash holdings. South African firms deplete cash reserves through investments when business confidence and economic growth are high but will build up the reserves when confidence is low, and the economy is not growing.
The study also found evidence of the existence of optimum cash levels and that any deviation from this level will result in loss of firm value. While firms often find their cash
v
levels away from the target levels, this study found that firm-specific, institutional, and macroeconomic factors determine the speed with which these cash holding deviations are adjusted.
The study also reveals that corporate cash holding behaviour is affected by managerial ability. While past studies have treated firms to be homogeneous, the findings of this study prove that the idiosyncratic managerial ability makes firm manage cash differently. Highly skilled managers are found to hold less cash than other managers. Investors are also found to value cash holdings in firms with high ability managers more positively than in firms under the care of low ability managers. Consistent with these findings, this study also found that high ability managers are associated with slower cash holdings speed of adjustment. This means that when their cash levels deviate from the optimum levels, high ability managers are not under pressure from shareholders to bring back cash levels to the optimum levels.
The study has some limitations. First, the study focussed only on non-financial firms listed on the JSE. This sample excludes unlisted firms that contribute greatly to the economy of South Africa. Future studies could focus on unlisted firms or a combination to the two. Secondly, financial firms were excluded from the study because of regulations that determine their cash holdings. With studies showing a growing trend of financialisation of South African corporates, future studies could focus on cash holdings in financial firms. Furthermore, this study and the previous ones use the quantitative research approach to understand South African corporate cash holdings. Insights from corporate managers regarding the factors they consider when determine cash holdings policies are yet to be captured. Future studies can follow the qualitative research method to fully understand corporate cash holdings.
Key words
Corporate cash holdings; optimum cash holdings; speed of adjustment; firm value; institutional factors; macroeconomic factors; managerial ability