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Corporate Cash Holdings: Determinants and the Impact of Corporate Ownership

Petersen, Hugo LU (2024) NEKN02 20241
Department of Economics
Abstract
This paper investigates two facets of corporate cash holdings in firms listed on the Stockholm Stock Exchange over the period 2001−2020. Firstly, I examine the determinants of corporate cash holdings. I find that firms with more investment opportunities and smaller firms tend to hold more cash. Firms with controlling shareholders and firms with high institutional block holdings tend to hold less cash. The effect of controlling shareholders is more pronounced when the controlling shareholder is a family.
Secondly, I explore the impact of excess cash and corporate ownership on firm valuation. My results indicate that excess cash is more valuable in firms with controlling shareholders, and the effect is more pronounced in... (More)
This paper investigates two facets of corporate cash holdings in firms listed on the Stockholm Stock Exchange over the period 2001−2020. Firstly, I examine the determinants of corporate cash holdings. I find that firms with more investment opportunities and smaller firms tend to hold more cash. Firms with controlling shareholders and firms with high institutional block holdings tend to hold less cash. The effect of controlling shareholders is more pronounced when the controlling shareholder is a family.
Secondly, I explore the impact of excess cash and corporate ownership on firm valuation. My results indicate that excess cash is more valuable in firms with controlling shareholders, and the effect is more pronounced in institutional-controlled firms. Excess cash does not have a significant impact on firm valuation in firms with dispersed ownership. When controlling for types of ownership, I observe that the impact of excess cash on firm valuation is significant when the relationship between investment decisions and firm valuation is insignificant. This indicates that capital markets view excess cash as valuable in firms with controlling shareholders because they perceive that investments performed by these shareholders are allocated ineffectively, possibly due to the consumption of private benefits of control. The negative impact of capital ownership is marginally less severe in firms with controlling shareholders. Unlike previous research, I do not find a significant relationship between excess control and firm valuation.
Future research should explore the true value of private benefits of control, not the value reflected by the capital markets. (Less)
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author
Petersen, Hugo LU
supervisor
organization
course
NEKN02 20241
year
type
H1 - Master's Degree (One Year)
subject
keywords
Corporate Cash Holdings, Corporate Governance, Corporate Ownership, Excess Cash, Firm Valuation, Private Benefits of Control
language
English
id
9169421
date added to LUP
2024-08-12 15:58:09
date last changed
2024-08-12 15:58:09
@misc{9169421,
  abstract     = {{This paper investigates two facets of corporate cash holdings in firms listed on the Stockholm Stock Exchange over the period 2001−2020. Firstly, I examine the determinants of corporate cash holdings. I find that firms with more investment opportunities and smaller firms tend to hold more cash. Firms with controlling shareholders and firms with high institutional block holdings tend to hold less cash. The effect of controlling shareholders is more pronounced when the controlling shareholder is a family.
Secondly, I explore the impact of excess cash and corporate ownership on firm valuation. My results indicate that excess cash is more valuable in firms with controlling shareholders, and the effect is more pronounced in institutional-controlled firms. Excess cash does not have a significant impact on firm valuation in firms with dispersed ownership. When controlling for types of ownership, I observe that the impact of excess cash on firm valuation is significant when the relationship between investment decisions and firm valuation is insignificant. This indicates that capital markets view excess cash as valuable in firms with controlling shareholders because they perceive that investments performed by these shareholders are allocated ineffectively, possibly due to the consumption of private benefits of control. The negative impact of capital ownership is marginally less severe in firms with controlling shareholders. Unlike previous research, I do not find a significant relationship between excess control and firm valuation.
Future research should explore the true value of private benefits of control, not the value reflected by the capital markets.}},
  author       = {{Petersen, Hugo}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Corporate Cash Holdings: Determinants and the Impact of Corporate Ownership}},
  year         = {{2024}},
}