Firm Structure and Corporate Cash Holdings

41 Pages Posted: 6 Sep 2010 Last revised: 10 Oct 2016

See all articles by Venkat Subramaniam

Venkat Subramaniam

Tulane University

Tony T. Tang

Barclays Global Investors; XY Investments

Heng Yue

Singapore Management University - School of Accountancy

Xin Zhou

XY Investments

Date Written: September 6, 2010

Abstract

We analyze whether the organizational structure of firms (i.e., whether a firm is diversified or focused) affects their cash holdings. Using Compustat firm level and segment level data, we find that diversified firms hold significantly less cash than their focused counterparts. Our results are robust to industry adjustments at the segment level and to different factors previously found to be important determinants of cash holdings. Using time-series, cross-sectional, and additional robustness tests we are able to attribute the lower cash holdings among diversified firms to complementary growth opportunities across the different segments of these firms and the availability of active internal capital markets. We find that the other theories that rely on the potentially effective use of asset sales of non-core segments of diversified firms to generate cash, and the increased agency/influence costs in diversified firms do not offer an economically significant explanation for the lower cash holdings among diversified firms.

Keywords: Firm Structure, Cash Holdings, Internal Capital Markets, Asset Sales, Agency Costs

JEL Classification: G32, D92

Suggested Citation

Subramaniam, Venkat R. and Tang, Tony T. and Tang, Tony T. and Yue, Heng and Zhou, Xin, Firm Structure and Corporate Cash Holdings (September 6, 2010). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1672692

Venkat R. Subramaniam (Contact Author)

Tulane University ( email )

A.B. Freeman School of Business
New Orleans, LA 70118
United States
504-865-5493 (Phone)
504-862-8327 (Fax)

HOME PAGE: http://www.tulane.edu/~vencat

Tony T. Tang

Barclays Global Investors ( email )

400 Howard Street
San Francisco, CA 94105
United States
4158465681 (Phone)

XY Investments ( email )

333 Lanhua Road
Shanghai, 200135
China
+8615618343868 (Phone)

Heng Yue

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Xin Zhou

XY Investments

China

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