How Sensitive are Japanese Firms to Earnings Risk? Evidence from Cash Holdings

42 Pages Posted: 27 Mar 2006

See all articles by Pascal Nguyen

Pascal Nguyen

University of New South Wales

Date Written: June 2006

Abstract

We investigate the hypothesis that cash balances have a precautionary motive and serve to mitigate the volatility of operating earnings, which we use as a proxy for risk. Our results show that cash holdings are positively associated with firm level risk, but negatively related to industry risk. Consistent with previous findings, cash holdings are decreasing with the firm's size and debt ratio, and increasing with its profitability, growth prospects, and dividend payout ratio. The precautionary motive for holding cash is investigated by analyzing different cases under which cash shortfalls have different cost implications. The results show that keiretsu affiliated firms hold less cash and are less risk sensitive. There is also evidence that financial constraints reduce the incentives to mitigate earnings risk. Finally, we show that bank-controlled firms and highly leveraged firms increased their sensitivity to earnings volatility as the condition of Japanese banks deteriorated after 1998. Overall, our results strongly support the precautionary motive for holding cash and underline the importance of corporate risk mitigation.

Keywords: Risk mitigation, cash, precautionary motive, financial constraints, banking crisis, Keiretsu affiliation

JEL Classification: G30

Suggested Citation

Nguyen, Pascal, How Sensitive are Japanese Firms to Earnings Risk? Evidence from Cash Holdings (June 2006). Available at SSRN: https://ssrn.com/abstract=889502 or http://dx.doi.org/10.2139/ssrn.889502

Pascal Nguyen (Contact Author)

University of New South Wales ( email )

Sydney, NSW 2052
Australia
(61) 2-9385-5773 (Phone)
(61) 2-9385-6730 (Fax)

HOME PAGE: http://www.banking.unsw.edu.au/pascalnguyen/

Register to save articles to
your library

Register

Paper statistics

Downloads
314
rank
91,706
Abstract Views
2,241
PlumX Metrics