Rationality of Corporate Cash Holdings

Ai Oku, Hayato Hashimoto and Keigo Watanabe
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Ai Oku: Chief Economist, Policy Research Institute
Hayato Hashimoto: Former Senior Economist, Policy Research Institute
Keigo Watanabe: Researcher, Policy Research Institute

Discussion papers from Policy Research Institute, Ministry of Finance Japan

Abstract: Cash equivalents (cash/deposit) held by Japanese firms were as much as 222 trillion yen in Fiscal Year 2017, but their value is discounted by the market. The background may be that cash is not effectively used because it is built up with ROE remaining low. Individual firms may think that their cash holdings behavior is reasonable, but it does not improve market valuation and the firms fail to properly increase their corporate value. Means to improve corporate value using cash they hold may include investment in people and businesses, and return to shareholders if there are surplus funds. We analyzed the rate of stock price increase of firms that had acquired shares of its own shares, and found that the rate of stock price increase of gfirms with room for improvement in capital efficiency h is higher compared with gthe other firms. h In addition, investment toward human capital is important for firms f growth. Corporate managers are required to make more rational decisions concerning cash holdings also with consideration of valuation by the market.

Keywords: cash holdings; corporate governance; excess cash (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2018-09
New Economics Papers: this item is included in nep-cfn
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