Changes in Cash Holdings Around the S&P 500 Additions

21 Pages Posted: 24 Sep 2011 Last revised: 26 Mar 2013

Eric R. Brisker

The University of Akron

Gonul Colak

Hanken School of Economics

David R. Peterson

Florida State University - Department of Finance

Date Written: March 14, 2013

Abstract

We analyze the changes in cash holding policies of S&P 500 firms before and after their inclusion in the index. One year after inclusion, the mean industry-adjusted cash holdings of these firms decline by nearly 32% from the year before inclusion. Several factors explain this decline. The precautionary motive for cash subsides due to these firms becoming more visible, less uncertain, and less constrained to raise cheap external capital. Corporate governance deteriorates after inclusion due to increased managerial entrenchment, which leads to a reduction in cash as suggested by the free cash flow hypothesis. Most index firms face diminishing investment opportunities and decreasing capital expenditures, which implies a lesser need for cash holdings related to the transaction motive.

Keywords: cash holdings, corporate governance, liquidity policy, S&P 500 Index

JEL Classification: G31, G34

Suggested Citation

Brisker, Eric R. and Colak, Gonul and Peterson, David R., Changes in Cash Holdings Around the S&P 500 Additions (March 14, 2013). Journal of Banking and Finance, Vol. 37, No. 5, 2013. Available at SSRN: https://ssrn.com/abstract=1932368 or http://dx.doi.org/10.2139/ssrn.1932368

Eric R. Brisker

The University of Akron ( email )

Akron, OH 44325-4803
United States

Gonul Colak (Contact Author)

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

David R. Peterson

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)

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