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Cash Holdings from a Risk Management Perspective - A study on high investment firms

Bjørndalen, Fanny Andrea and Nilsson, Johanna LU (2015) FEKN90 20151
Department of Business Administration
Abstract
Due to a globalized market place, risk management has grown in importance and become a central part of firms’ corporate strategies. The incentives for engaging in risk reducing activities revolve around reduced agency costs and exploitation of financial advantages. According to the precautionary motive for holding cash, firms must ensure stable and secure access to capital for future investments. This is most prominent for firms with high investment opportunities, and firms who rely on R&D and high capital expenditures to support future operations. Risk management, and hedging in particular, reduces the need for costly external funding, letting firms invest in risky projects. This study is designed to look at whether hedging and cash... (More)
Due to a globalized market place, risk management has grown in importance and become a central part of firms’ corporate strategies. The incentives for engaging in risk reducing activities revolve around reduced agency costs and exploitation of financial advantages. According to the precautionary motive for holding cash, firms must ensure stable and secure access to capital for future investments. This is most prominent for firms with high investment opportunities, and firms who rely on R&D and high capital expenditures to support future operations. Risk management, and hedging in particular, reduces the need for costly external funding, letting firms invest in risky projects. This study is designed to look at whether hedging and cash holdings can be seen as substitutive risk management tools in the manner that hedgers are allowed to hold lower cash reserves. The study also examines if this relationship is strengthened under possible underinvestment problems. With a deductive approach, we investigate the effect hedging has on cash holdings using multivariate regression analysis. Based on this we find evidence that firms with high investment opportunities hold less cash when they hedge. We also find that hedgers lower their cash reserves and therefore we suggest that, from a risk management perspective, hedging and cash holdings can be seen as substitutes. (Less)
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author
Bjørndalen, Fanny Andrea and Nilsson, Johanna LU
supervisor
organization
course
FEKN90 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
Cash Management, Cash Holdings, Hedging, Risk Management, Underinvestment problems, Investment opportunities
language
English
id
7456377
date added to LUP
2015-06-29 07:49:20
date last changed
2015-06-29 07:49:20
@misc{7456377,
  abstract     = {Due to a globalized market place, risk management has grown in importance and become a central part of firms’ corporate strategies. The incentives for engaging in risk reducing activities revolve around reduced agency costs and exploitation of financial advantages. According to the precautionary motive for holding cash, firms must ensure stable and secure access to capital for future investments. This is most prominent for firms with high investment opportunities, and firms who rely on R&D and high capital expenditures to support future operations. Risk management, and hedging in particular, reduces the need for costly external funding, letting firms invest in risky projects. This study is designed to look at whether hedging and cash holdings can be seen as substitutive risk management tools in the manner that hedgers are allowed to hold lower cash reserves. The study also examines if this relationship is strengthened under possible underinvestment problems. With a deductive approach, we investigate the effect hedging has on cash holdings using multivariate regression analysis. Based on this we find evidence that firms with high investment opportunities hold less cash when they hedge. We also find that hedgers lower their cash reserves and therefore we suggest that, from a risk management perspective, hedging and cash holdings can be seen as substitutes.},
  author       = {Bjørndalen, Fanny Andrea and Nilsson, Johanna},
  keyword      = {Cash Management,Cash Holdings,Hedging,Risk Management,Underinvestment problems,Investment opportunities},
  language     = {eng},
  note         = {Student Paper},
  title        = {Cash Holdings from a Risk Management Perspective - A study on high investment firms},
  year         = {2015},
}