Why would companies hold cash in their bank accounts, when cash itself does not produce any further value like an investment in a machine does? The academic literature finds different concepts for the reasons of corporate cash holdings. While Keynes (1936) proposes a transaction- and precautionary-motive to hold cash, Jensen (1986) states that managers have a vested interest to accumulate cash, because it exempts them from capital market disciplining. However, country-specific factors and reforms in Japan might also induce the companies to save up liquid assets.
The aim of this paper is to study the development, determinants and valuation of Japanese corporate cash holdings in the period from 1988 to 2021, based on the approach of Bates et al. (2009). Furthermore, I want to study how the roles of theoretical cash holding motives and corporate governance (reforms) in Japan are reflected in the three objects of research from above. Since the variables only proxy the theoretical motives, the object of this paper is not to create clear boundaries but to give an insight in the possible forms of their appearing.
Therefore the next chapter gives a comprehensive overview about the academic literature regarding the theoretical background for corporate cash holdings and the current state of research of the interaction between corporate governance and cash holdings in Japan. The motives and findings from this section are revisited when explaining the results of the empirical part in this paper. The empirical part is divided in three main parts. The first part discusses the development of corporate cash holdings in general and for different kinds of companies. In the subsequent part, I put a focus on the factors that determine the cash holdings and how they serve as proxies for the theoretical motives, as discussed before. The last part shows how investors in Japan value cash holdings in general. Chapter 5 summarizes the findings.
Table of Contents
1 Introduction
2 Review of the literature
2.1 Theoretical background for the holding of liquidity
2.2 Japanese corporate governance situation and its impact on cash holdings
3 Sample and description
3.1 Development of the Japanese corporate cash and leverage holdings
3.2 Types of companies that hold more cash
4 Regression estimates
4.1 Determinants for the corporate cash holdings
4.2 Regression results for the value of cash holdings
5 Conclusion
Research Objectives and Key Topics
This paper examines the development, determinants, and market valuation of corporate cash holdings in Japan from 1988 to 2021. It aims to investigate how theoretical motives for cash holding and Japanese corporate governance reforms are reflected in these observed trends and company behaviors.
- Evolution of Japanese corporate cash and leverage ratios over three decades.
- Influence of firm-specific characteristics and industry factors on cash retention.
- Impact of the keiretsu system and corporate governance reforms on managerial decision-making.
- Valuation of cash reserves by investors across different firm sizes and industries.
- Application of established economic theories (Keynes, Jensen, Myers & Majluf) to the Japanese market context.
Excerpt from the Paper
3.1 Development of the Japanese corporate cash and leverage holdings
The second column of Table 1 reports the number of observations in each year, while the aggregated cash ratio in column 3 expresses the sum of cash divided by the sum of assets in each year. As one can see in columns 4 and 5, the average and median cash ratio tend to decline during the 1990s and then steadily increase in the 2000s and 2010s. This is consistent with the findings of Aoyagi and Ganelli (2014) and Kato et al. (2016) that the corporate governance reforms after the Japanese financial crisis, described in the second chapter, led on average to fewer cash holdings. Bates et al. (2009) show a similar development for the average cash holdings for firms from the U.S. – although these cash holdings are considerably smaller than the Japanese ones, which is in accordance with many findings in the academic literature (Kalcheva and Lins, 2007; Pinkowitz and Williamson, 2001). However, the average corporate cash holdings of Japanese firms rise significantly by approx. 54% after the financial crisis in 2008, from 17.6% to 27.1% between 2008 and 2021.
Summary of Chapters
1 Introduction: This chapter defines the research scope and objectives, motivating the inquiry into why Japanese companies maintain high cash balances despite the existence of standard financial theories.
2 Review of the literature: This section details the theoretical foundations of liquidity demand, specifically transaction and precautionary motives, and reviews the Japanese corporate governance context, particularly the role of keiretsu and main banks.
3 Sample and description: This chapter introduces the methodology for data selection from Compustat and presents descriptive statistics on the trends of cash and leverage ratios, including an analysis by firm size.
4 Regression estimates: This part provides an empirical analysis using OLS and Fama-MacBeth regressions to identify the determinants of cash holdings and evaluate how investors value these cash reserves.
5 Conclusion: The final chapter synthesizes the main findings, confirming that while some reforms have impacted corporate behavior, precautionary motives and unique Japanese institutional structures remain primary drivers of cash accumulation.
Keywords
Corporate cash holdings, Japan, Keiretsu, Corporate governance, Precautionary motive, Agency costs, Firm size, Market value, Leverage, Capital structure, Financial distress, Investment opportunities, Dividend policy, Compustat, Regression analysis.
Frequently Asked Questions
What is the central focus of this research?
The research focuses on analyzing the development, determinants, and economic valuation of cash holdings in Japanese companies between 1988 and 2021.
Which theoretical frameworks are applied?
The paper utilizes established theories such as the transaction-motive and precautionary-motive introduced by Keynes (1936), the Free Cash Flow Hypothesis (FCFH) by Jensen (1986), and the pecking-order theory by Myers and Majluf (1984).
What is the primary objective of this work?
The primary goal is to study how corporate cash holding motives and Japanese corporate governance reforms are reflected in the evolution and valuation of cash reserves within the Japanese market.
Which methodology does the author use?
The author follows the approach of Bates et al. (2009), utilizing data from non-financial and non-utility Japanese firms to perform OLS and Fama-MacBeth regressions.
What is covered in the main body of the paper?
The main body examines descriptive statistics of Japanese cash and leverage trends, tests determinants of these holdings using multivariate regression models, and assesses investor valuation of cash based on industry and firm characteristics.
How would you summarize the core findings regarding keywords?
Key characterizations include the high reliance on internal funds, the influential role of the keiretsu structure, and the varying valuation of cash depending on growth opportunities versus mature industries.
What specific impact did the keiretsu system have on cash holdings?
The keiretsu system historically influenced firms to rely on main banks for funding; however, the lack of competitive pressure and cross-shareholdings contributed to an environment where firms often accumulated higher cash balances than their international peers.
How do investors currently value cash in Japanese firms?
Investors reward cash holdings in smaller or high-growth industries where these reserves fund investment opportunities, but they tend to discount cash in mature, low-growth industries due to concerns over managerial waste.
- Quote paper
- Maximilian Gennrich (Author), 2022, The development, determinants and valuation of cash holdings of Japanese companies, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/1334101
