Acharya, V. V., Almeida, H., and M. Campello, 2007, Is cash negative debt? A hedging perspective on corporate financial policies. Journal of Financial Intermediation. 16(4), 515–54.
Allen, F., Michaely, R., 2003, Dividend policy. In: Constantinides, G., Harris, M., Stulz, R. (Eds.), Handbook of the Economics of Finance. North-Holland, Amsterdam.
Almeida, H., Campello, M. and M.S. Weisbach, 2004, The Cash Flow Sensitivity of Cash. The Journal of Finance. 59(4) pp. 1777–1804.
Aoyagi, C. and G. Ganelli, 2014, Unstash the Cash! Corporate Governance Reform in Japan. IMF Working Paper No. 14/140, pp. 1–23.
Bates, T., Kahle, K. and R. Stulz. 2009, Why Do US Firms Hold So Much More Cash than They Used To? The Journal of Finance. 64(5) pp. 1985–2021.
DeAngelo, H., DeAngelo, L., 2006, The irrelevance of the MM dividend irrelevance theorem. Journal of Financial Economics 79. pp. 293–316.
DeAngelo, H., DeAngelo, L., Skinner, D.J., 2004, Are dividends disappearing? Dividend concentration and the consolidation of earnings. Journal of Financial Economics. 72, pp. 425–456.
Denis, D. J. and I. Osobov. 2008, Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial Economics. 89(1), 62–82.
Dittmar, A., Mahrt-Smith, J., and H. Servaes. 2003, International Corporate Governance and Corporate Cash Holdings. Journal of Financial and Quantitative Analysis. 38(1) pp. 111–33.
Hori, K., Koichi, A. and M. Saito. 2010, On the Determinants of Corporate Cash Holdings in Japan: Evidence from Panel Analysis of Listed Companies (Japanese). Gendai Finance. 27: 3–24.
Hoshi, K., Kashyap, A., and D. Shrafstein. 1991, Corporate Structure, Liquidity and Investment: Evidence from Japanese Industrial Groups. Quarterly Journal of Economics. 106(1): 33–60.
Jensen, M. 1986, Agency Cost for Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review. 57(2), pp. 283–306.
Krause, R., Semadeni, M. and A.A. Cannella, Jr. CEO Duality: A Review and Research Agenda. Journal of Management. 40(1): 256–86.
Mulligan, C. 1997, Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms. Journal of Political Economy. 105, pp. 1061–79.
Myers, S. and N. Majluf. 1984, Corporate Financing and Investing Decisions When Firms Have Information That Investors Do Not Have. Journal of Financial Economics. 13(2), pp. 187–221.
Naoki, S. 2012, Firms’ Cash Holdings and Performance: Evidence from Japanese Corporate Finance. RIETI Discussion Paper Series. Development Bank of Japan. 12-E-031.
Opler, T., Pinkowitz, L., Stulz, R. and R. Williamson. 1999, The Determinants and Implications of Corporate Cash Holdings. Journal of Financial Economics. 52, pp. 3- 46.
Pinkowitz, L. and R. Williamson. 2001, Bank Power and Cash Holdings: Evidence from Japan. Review of Financial Studies. 14, pp. 1059–82.
Rajan, R. and L. Zingales. 1995, What Do We Know about Capital Structure? Evidence from International Data. Journal of Finance. 50, pp. 1421–60.
Syed, M. and J. Lee. 2010, Japan’s Quest for Growth: Exploring the Role of Capital and Innovation. IMF Working Paper No. 10/294, pp. 1–20.
I would like to thank Shi Piao for providing the data and for excellent research assistance. I would also like to thank, without implicating, Adrian Alter, Dennis Botman, Stephan Danninger, Joong Shik Kang, Malhar Nabar, Jerald Schiff and seminar participants in the Asia and Pacific Department for many helpful suggestions.
In this paper I define cash to be money available for use in normal company operations, consistent with the definition of field 02003 in the Worldscope database. Cash in this paper therefore follows a narrow definition that excludes short-term marketable securities.
In 1995 these figures were about 40 percent and 130 percent respectively. (Source: Flow of Funds, Bank of Japan.)
According to the April 2014 edition of the International Monetary Fund’s World Economic Outlook database, the countries with the largest gross domestic product by purchasing power parity in 2013 were: the US ($16.8tn), China ($13.4tn), India ($5.1tn) and Japan ($4.7tn).
I consider ‘debt’ to be interest-bearing contractual financing agreements, as defined by Worldscope.
Specifically, Pinkowitz and Williamson (2001) find that the average ratio of cash to total assets minus cash is 18.5 percent. If cash divided by total assets minus cash is 18.5 percent, then cash divided by total assets is 1/(1+1/0.185) = 15.6 percent.
The Worldscope database provides balance sheet and income statement information for the consolidated firm to the greatest extent possible.
This negative relationship reflects one of the costs of holding cash, as opposed to “transaction cost” or “precautionary demand” motives which are benefits of cash
Between 1995 and 2004, the Business Outlook Survey only asked firms about their expected “business conditions”: two quarters ahead, rather than their demand outlook. My definition of demand outlook is therefore different before and after 2004.
The Business Outlook Survey classifies firms by size into three categories: firms with assets less than ¥100m, firms with assets of between ¥100m and ¥1bn, and firms with assets of over ¥1bn.
ISIN stands for International Security Identification Number, and uniquely identifies securities trading on exchanges worldwide. I match Bloomberg data to Worldscope data using the ISIN for the company’s stock.
I add control variables for management risk aversion and measurable corporate governance standards, but these concepts are difficult to measure due to their richness and to missing data. To the extent that some elements of risk aversion or corporate governance structure are time-invariant, one can capture these effects through the firm-specific error component ci.
Importantly, the evidence here cannot be construed as causal because the dependent and explanatory variables in (3) are jointly determined.
Including firm-specific fixed effects in a tobit model yields inconsistent estimation of β (Wooldridge, 2010).
The dividend payout ratio in each firm—year is defined as the ratio of declared dividends per share, including extra dividends and excluding special dividends, to basic earnings per share.
The p-value of the Hansen test in specification (2) of Table 1 is close to 1, indicating there may be a problem of too many instruments in this specification. This observation does not affect my findings.
The R2 of 80 percent is calculated as the squared correlation between the fitted cash-to-asset ratios
To the extent that the theory of cash holdings is incomplete, the residuals from the baseline regression can also be interpreted as the component of cash holdings that cannot be explained by existing theory. Incomplete data could also contribute to this inability to explain cash holdings.
Note that target cash-to-asset ratios do not depend on the lagged dependent variable, even though actual and fitted cash-to-asset ratios depend on the lagged dependent variable. Hence there is no contribution from the lagged dependent variable in Figure 6.
The negative coefficient in the regression of cash-to-asset ratios on investment in the baseline system GMM specification in Table 1 above reflect (i) the contemporaneous covariance between cash-to-asset ratios and investment, (ii) the longitudinal autocovariance in investment due the instrument set, and (iii) the set of control variables in the regression. The same coefficient in the fixed effects regression reflects only (i) and (iii). Therefore, we cannot say that we have found evidence for the trade-off between cash holdings and investment based on the regressions in Table 1 alone.
According to the national accounts published by the Bank of Japan, Japanese nonfinancial firm assets amounted to 2.07 times nominal GDP in 2013.