Evidence of cash conservative and low-leverage firms in UK and Germany
Data: UK and Germany(2005-2012) firms’ financial figures (equity, loans, cash in reserves etc. use data from ) http://ukdataservice.ac.uk/.
Data: UK and Germany(2005-2012) firms’ financial figures (equity, loans, cash in reserves etc. use data from ) http://ukdataservice.ac.uk/.
International Monetary Fund (IMF): the datasets include economic,
nancial and government statistics;
Organization for Economic Co-operation and Developing (OECD):
among other items, the dataset include labor force, trade, national
account and economic statistics;
World Bank (WB): in particular you should look at the World
Development Indicators (WDI).
1 Describe the theory financially conservative policies;
nancial and government statistics;
Organization for Economic Co-operation and Developing (OECD):
among other items, the dataset include labor force, trade, national
account and economic statistics;
World Bank (WB): in particular you should look at the World
Development Indicators (WDI).
1 Describe the theory financially conservative policies;
2 Individuate a group (some groups) of fi
rms which are
financially conservative;
financially conservative;
3 Use test for diference in mean to test whether the
grouping criterion you have chosen works;
grouping criterion you have chosen works;
4 Build up a dummy and test whether some basic
relationships are di¤erent for this group of firms;
relationships are di¤erent for this group of firms;
5 Use logit/probit/regression analysis to test the
alternative hypothesis that the group of fi rms you have
selected is distressed/conservative.
alternative hypothesis that the group of fi rms you have
selected is distressed/conservative.
The aim of this paper is threefold:
1 To de fine fi nancial conservatism;
2 To identify a sample of rms that adopt persistent nancial
conservative policies;
3 To investigate the characteristics of conservative rms by focusing on
the role of agency problems (ownership characteristics) in affecting the
choice of a ffinancial conservative policy.
Policy of persistent high-cash reserves (Mikkelson and Partch 2003).
Motives for large cash reserves:
1 To de fine fi nancial conservatism;
2 To identify a sample of rms that adopt persistent nancial
conservative policies;
3 To investigate the characteristics of conservative rms by focusing on
the role of agency problems (ownership characteristics) in affecting the
choice of a ffinancial conservative policy.
Policy of persistent high-cash reserves (Mikkelson and Partch 2003).
Motives for large cash reserves:
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Serve shareholdersinterests by providing low cost of financing (Almeida
2004, Myers and Majluf 1984);
Serve managersinterests by consuming private bene ts easily (Jensen
1986).
or
Policy of persistent low-leverage levels (Minton and Wruck 2001).
Motives for low leverage:
Provides shareholders with flexibility in financing future investments
(Myers 1984);
Protect managers against expected costs of financial distress (Berger et
al. 1997).
Serve shareholdersinterests by providing low cost of financing (Almeida
2004, Myers and Majluf 1984);
Serve managersinterests by consuming private bene ts easily (Jensen
1986).
or
Policy of persistent low-leverage levels (Minton and Wruck 2001).
Motives for low leverage:
Provides shareholders with flexibility in financing future investments
(Myers 1984);
Protect managers against expected costs of financial distress (Berger et
al. 1997).
Combine both aspects of
financial conservatism.
Firms may want to attain fi
nancial flexibility by adopting both forms
of conservatism at the same time.
of conservatism at the same time.
Consistent with Capital Structure Theories:
Pecking order theory: firms should first exhaust internally available
funds and then resort to more expensive external debt;
Pecking order theory: firms should first exhaust internally available
funds and then resort to more expensive external debt;
Agency theory: both FCP may coexist because managers may have
incentives to stockpile cash in order to avoid debt fi nancing.
Consistent with the evidence that:
Firms with high growth opportunities and leverage-conservative are
cash rich (Kaplan & Zingales, 1998);
Financially (or leverage) constrained firms tend to hold large cash
reserves (Fazzari, Hubbard & Petersen, 1996).
incentives to stockpile cash in order to avoid debt fi nancing.
Consistent with the evidence that:
Firms with high growth opportunities and leverage-conservative are
cash rich (Kaplan & Zingales, 1998);
Financially (or leverage) constrained firms tend to hold large cash
reserves (Fazzari, Hubbard & Petersen, 1996).
Choose
xed threshold levels of cash holdings and leverage to identify
fi nancially conservative fi rms:
A rm is said to be leverage conservative if its annual ratio of total
debt to total assets belongs to the . . . first 20% of all fi rms for five
consecutive years (Minton and Wruck 2001).
A rm is said to be cash conservativeif it holds annually more than
25% of its assets in cash and cash equivalents for fi ve consecutive
years (Mikkelson and Partch 2003).
fi nancially conservative fi rms:
A rm is said to be leverage conservative if its annual ratio of total
debt to total assets belongs to the . . . first 20% of all fi rms for five
consecutive years (Minton and Wruck 2001).
A rm is said to be cash conservativeif it holds annually more than
25% of its assets in cash and cash equivalents for fi ve consecutive
years (Mikkelson and Partch 2003).
