Why New Zealand Companies Hold Cash: An Empirical Analysis

Contents

1. Introduction

2. Theory of Corporate Cash Holdings

2.1 Static Trade-Off Model

2.2 Financing Hierarchy Model

2.3 Free Cash Flow Model

2.4 Additional Factors Influencing Corporate Cash Holdings

2.5 Summary of Theoretical Models

3. Review of Empirical Studies

4. Data

4.1 Data Description

4.2 Variable Definitions

4.3 Descriptive Statistics

5. Statistical Background

5.1 Introduction to Panel Data Models

5.2 Regression Methodologies

5.2.1 Fama-MacBeth Model

5.2.2 Cross-Sectional Regression

5.2.3 Time-Series Cross-Sectional Regression with Year Dummies

5.2.4 Fixed-Effects Regression

5.3 White Standard Errors

6. Empirical Investigations

6.1 Univariate Tests

6.2 Determinants of Corporate Cash Holdings

6.2.1 Basic Regressions on the Whole Data Sample

6.2.2 Regression with Cash Flow Variability and 1/Z-Score

6.2.3 Regression with Cash Flows from Cash Flow Statements

6.2.4 Regression Tests for Managerial Discretion

6.3 Investigation of Mean Reverting Characteristics

7. The Use of Excess Cash

7.1 Review of Current Literature on Excess Cash Holdings

7.2 Empirical Investigation of Excess Cash Holdings

8. Conclusion

A. Summary of Empirical Studies

B. SPSS Syntax Files

B.1 Syntax for Performing Regressions with White’s Standard Errors

B.2 Syntax for Performing a Series of Regressions

C. Additional Regressions

Objectives & Key Research Themes

This thesis investigates the determinants of corporate cash holdings among companies listed on the New Zealand Stock Exchange between 1980 and 2003, aiming to identify whether these firms maintain an optimal cash level and which factors influence their liquidity decisions.

• Theoretical analysis of cash holding motives based on trade-off, financing hierarchy, and free cash flow models.
• Empirical determination of influencing factors such as growth opportunities, leverage, and cash flow variability.
• Investigation into the existence of target cash levels and the speed of adjustment toward these targets.
• Examination of excess cash utilization, including capital expenditures, acquisitions, and dividend policies.

Excerpt from the Book

Summary of Chapters

1. Introduction: Presents the motivation for studying corporate cash holdings in New Zealand and outlines the three guiding theoretical models.

2. Theory of Corporate Cash Holdings: Discusses the trade-off, financing hierarchy, and free cash flow models as frameworks for corporate liquidity.

3. Review of Empirical Studies: Provides an overview of existing international research on the determinants of corporate cash holdings.

4. Data: Describes the sample construction and defines the financial variables and proxies used in the empirical analysis.

5. Statistical Background: Details the panel data regression methodologies and the implementation of White standard errors to account for heteroskedasticity.

6. Empirical Investigations: Presents the core regression results, univariate tests, and the analysis of mean-reverting characteristics of cash holdings.

7. The Use of Excess Cash: Examines how New Zealand firms utilize excess cash and investigates patterns in corporate spending.

8. Conclusion: Summarizes the key findings and links the empirical evidence back to the theoretical predictions of corporate cash management.

Keywords

Corporate cash holdings, New Zealand Stock Exchange, Static trade-off model, Financing hierarchy model, Free cash flow theory, Panel data regression, Managerial discretion, Excess cash, Financial distress, Capital market imperfections, Liquid assets, Mean reversion, Target adjustment model.

Frequently Asked Questions

What is the primary focus of this research?

The research examines the reasons why New Zealand companies maintain specific levels of cash and identifies the determinants influencing their corporate liquidity decisions over the 1980-2003 period.

Which theoretical frameworks guide this study?

The study is guided by three main theories: the static trade-off model, the financing hierarchy (pecking order) model, and the free cash flow theory.

What is the central research question?

The study asks why firms hold large amounts of cash and whether there exists an optimal target cash level to which firms continuously adjust.

What methodology is applied to the data?

The study utilizes panel data regression techniques, including Fama-MacBeth, cross-sectional, and fixed-effects models, adjusted for heteroskedasticity using White standard errors.

What does the empirical analysis cover?

The analysis covers the determinants of cash holdings, the robustness of these determinants through various sub-samples, and the investigation of mean-reverting behavior in cash levels.

Which keywords best describe this study?

Key terms include corporate cash holdings, New Zealand market analysis, trade-off theory, capital structure, and target adjustment models.

How is "excess cash" identified in this study?

Excess cash is identified by comparing the actual cash stated in a company's balance sheet against the predicted cash level derived from the regression model.

Does the study find evidence of target adjustment?

Yes, the results strongly support a target adjustment model, suggesting that New Zealand companies adjust their cash holdings toward an optimal target relatively quickly.