International Evidence on the Non-Linear Impact of Leverage on Corporate Cash Holdings

Journal of Multinational Financial Management, Vol. 17, No. 1, 2007

24 Pages Posted: 7 Dec 2009

See all articles by Yilmaz Guney

Yilmaz Guney

University of Hull

Neslihan Ozkan

University of Bristol - School of Economics, Finance and Management, UK

Aydin Ozkan

Hull University Business School (HUBS)

Date Written: February 2006

Abstract

This paper investigates cash holding behaviour of firms from France, Germany, Japan, the UK and the US using data for 4,069 companies over the period 1996-2000. Our focus is particularly on the relation between cash holdings and leverage. We argue that the impact of leverage on cash balances of firms is likely to be non-monotonic. To the extent that leverage of firms acts as a proxy for their ability to issue debt one would expect a negative (substitution effect) relation between leverage and cash holdings. However, as leverage increases firms are likely to accumulate larger cash reserves to minimise the risk of financial distress and costly bankruptcy. Thus, one would expect a positive (precautionary effect) relationship between cash holdings and leverage at high levels of leverage. Our findings provide strong and robust support for a significant non-linear relation between cash holdings and leverage. Additionally, our results show that the impact of leverage on cash holdings partly depends on country-specific characteristics such as the degree of creditor protection, shareholder protection, and ownership concentration.

Keywords: cash holdings, leverage, investor protection

JEL Classification: G3, G32

Suggested Citation

Guney, Yilmaz and Ozkan, Neslihan and Ozkan, Aydin, International Evidence on the Non-Linear Impact of Leverage on Corporate Cash Holdings (February 2006). Journal of Multinational Financial Management, Vol. 17, No. 1, 2007. Available at SSRN: https://ssrn.com/abstract=1517110

Yilmaz Guney (Contact Author)

University of Hull ( email )

Hull, HU6 7RX
United Kingdom

HOME PAGE: http://https://www.hull.ac.uk/faculties/fblp/hubs.aspx

Neslihan Ozkan

University of Bristol - School of Economics, Finance and Management, UK ( email )

United States

HOME PAGE: http://www.bristol.ac.uk/accounting/staff/ozkan.html

Aydin Ozkan

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

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