Cultural and macroeconomic determinants of cash holdings management

• Date: 01 October 2020
• Published date: 01 October 2020
• DOI: http://doi.org/10.1111/jifm.12121
• Author: Svetlana V. Orlova

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J Int Financ Manage Account. 2020;31:270–294.

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INTRODUCTION

The topic of corporate cash holdings has been examined extensively in recent finance literature (e.g.,

Bakke & Gu, 2017; Bates, Chang, & Chi, 2018; Bates, Kahle, & Stulz, 2009; Dittmar & Duchin, 2010;

Dittmar & Mahrt-Smith, 2007; Foley, Hartzell, Titman, & Twite, 2007; Gao, Harford, & Li, 2013;

Harford, Mansi, & Maxwell, 2008; Nikolov & Whited, 2014; Opler, Pinkowitz, Stulz, & Williamson,

1999). There are two main explanations offered for the differences in the corporate cash policies:

capital market/financing frictions (Bates et al., 2018; Dittmar & Duchin, 2010; Opler et al., 1999)

and agency conflict (Dittmar & Mahrt-Smith, 2007; Gao et al., 2013; Nikolov & Whited, 2014). In

addition, recent finance literature has documented the effect of culture on various corporate policies

including investment decisions (Guiso, Sapienza, & Zingales, 2008), capital structure decisions (Chui,

Lloyd, & Kwok, 2002), level of cash holdings (Chang & Noorbakhsh, 2009; Chen, Dou, Rhee, Truong,

DOI: 10.1111/jifm.12121

ORIGINAL ARTICLE

Cultural and macroeconomic determinants of cash

holdings management

Svetlana V.Orlova

© 2020 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

Collins College of Business, The

University of Tulsa, Tulsa, OK, USA

Correspondence

Svetlana V. Orlova, Helmerich Hall 112-B,

The University of Tulsa, 800 South Tucker

Drive, Tulsa, OK 74104, USA.

Email: svo053@utulsa.edu

Abstract

This study examines patterns in cash management, particu-

larly cash holdings speed of adjustment (CH-SOA), across

48 countries. I find that managerial cultural characteristics

and country-level macroeconomic factors influence the per-

sistence of cash reserve levels, deviation from target, and

the speed with which firms in different countries adjust their

cash holdings. The findings support the idea that agency

costs as well as market frictions influence CH-SOA and

other aspects of cash management. The findings are robust

to the inclusion of a wide range of firm-level characteristics,

country-level corporate-governance variables, and an alter-

native cultural index.

KEYWORDS

agency costs, cash holdings, culture, market frictions

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& Veeraraghavan, 2015; Ramirez & Tadesse, 2009), corporate risk taking (Li et. al, 2013), dividend

payout (Shao, Kwok, & Guedhami, 2010), and mergers (Ahern, Daminelli, & Fracassi, 2015).

In this paper, I examine several aspects of cash holdings management, specifically the cash holdings

speed of adjustment (CH-SOA) across a large number of countries and test the effect of national culture and

macroeconomic variables on firms’ adjustment toward target. Prior research has documented that cultural

characteristics such as individualism (Chen et al., 2015), uncertainty avoidance (Chen et al., 2015), and

long-term orientation (Chang & Noorbakhsh, 2009) influence the level of cash holdings across countries.

However, this is just one aspect of cash management. To the best of my knowledge, no study has examined

the effect of national culture and market development on CH-SOA in international settings. This paper offers

a detailed examination of differences in cash management policy around the world, analyzing the influence

of cultural characteristics and macroeconomic factors on the volatility of cash reserves, deviation from target

level, and CH-SOA. I suggest that differences in the level of economic and financial development among

countries can be viewed as a proxy for market/financing frictions, while cultural traits can contribute to

agency conflict1. Thus, country-level macroeconomic and cultural factors can influence not only the amount

of cash that managers hold, but also the speed with which firms adjust their cash reserves to target levels.

Since previous studies have not explored how the levels of cash in different countries compare with

optimal levels of cash holdings,2 I examine how cultural traits of management influence firms’ speed of ad-

justment toward optimal levels of cash. Using cultural characteristics defined in Hofstede’s cultural index, I

find evidence that these characteristics influence not only the level of cash holdings but also their stability,

deviation from target, and SOA. Additionally, my analysis shows that several country-level economic/fi-

nancial development variables influence corporate cash holdings management. The findings are robust to

inclusion of a wide range of firm-level characteristics, country-level corporate-governance variables, and

economic and financial development variables, as well as to use of an alternative cultural index.

This study contributes to the literature in two ways. First, by comprehensively analyzing the ef-

fect of economic and cultural characteristics on the volatility of cash reserves, deviation from target

levels, and CH-SOA for 48 countries, it extends the literature on how culture and economic/financial

development affects cash management. Second, whereas previous studies of differences in CH-SOA

(e.g., Bates et al., 2018; Gao et al., 2013; Venkiteshwaran, 2011) concentrate on US firms, I provide

evidence that CH-SOA varies with country-level cultural and macroeconomic characteristics. Thus,

this study extends the corporate finance literature devoted to heterogeneity of cash holdings and lever-

age SOA. Furthermore, this study supports both the idea that corporate cash policies are influenced

by capital market/financing frictions (Bates et al., 2018; Dittmar & Duchin, 2010; Opler et al., 1999)

and the agency costs (Dittmar & Mahrt-Smith, 2007; Gao et al., 2013; Nikolov & Whited, 2014).

Specifically, I show that managerial cultural traits and financial market development represent fric-

tions that slow adjustment toward the optimal cash level.

The rest of the paper proceeds as follows: Section1 reviews the literature and offers several test-

able hypotheses. Section2 discusses the methods and describes the variables and data used. Section3

presents the empirical results, and Section 4 concludes.

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LITERATURE REVIEW AND HYPOTHESES

DEVELOPMENT

2.1

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Determinants of cash holdings

The finance literature documents systematic relationships among firm characteristics such as size,

net working capital, leverage, dividend payout, cash flow, capital expenditure, industry volatility,