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An Analysis of the Corporate Cash Holding Decision

Ranjan D'Mello, Sudha Krishnaswami and Patrick Larkin
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Ranjan D'Mello: Wayne State University
Sudha Krishnaswami: University of New Orleans
Patrick Larkin: Fayetteville State University

No 2005-02, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: We investigate the tradeoff theory as an explanation for how managers allocate cash to post-spin-off parent and subsidiary firms. Spin-offs provide an opportunity to examine the determinants of cash holdings free from the confounding effects of the pecking order theory. Our results indicate that difference in asset size, sales growth, research and development expenses, net working capital, and leverage significantly affect the difference in cash holdings of post-spin-off entities. These results suggest that cash holdings are decreasing in the ease of raising cash and availability of cash from internal sources, and are increasing in growth opportunities, asymmetric information levels, and financial distress costs.

Keywords: Trade-off theory; Spin-off; Cash holding (search for similar items in EconPapers)
JEL-codes: G34 C12 C21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
Date: 2005-11
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