International Evidence on the Non-Linear Impact of Leverage on Corporate Cash Holdings
By Yilmaz Guney, Aydin Ozkan, Neslihan Ozkan. 2007
219 citations recorded by the source corpus.
This paper investigates cash holding behaviour of firms from France, Germany, Japan, the UK and the US using data for 4,069 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.
Subfields: Accounting
View Paper: https://www.semanticscholar.org/paper/b98968200ac78260f055dc7dbdbff97bceca0076
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Citations in the corpus
- A theory of corporate financial decisions with liquidity and solvency concerns (2011, result): “A more refined study by Guney, Ozkan, and Ozkan (2007) provides evidence for a non-monotonic relation between cash holdings and debt, in line with this paper’s prediction.”
- Determinants of corporate cash holdings: evidence from the emerging market of Turkey (2014, background): “Besides, Drobetz and Grüninger (2007) and Guney et al. (2007) found a nonlinear association between the two variables.”