This article investigates the determinants of cash holdings by publicly-traded firms for 20 advanced and emerging countries over the last decade, with a focus on ratios of the firms' aggregate cash to their total assets. Panel-data regressions find that higher cash ratios were associated with fewer non-cash current assets, smaller costs of carry, larger contemporaneous cash inflows, fewer interest-bearing liabilities, greater expected investment opportunities, including research and development projects, greater uncertainty, and the state of corporate governance. Regarding the last result, higher cash ratios were associated with managers with worse ethical behavior, lower accountability to investors and board members, weaker investor protection, harsher auditing and reporting standards, and greater potential to face holdup problems by lending banks. The agency motive was greater than the precautionary and transaction-costs motives in terms of marginal impact while being limited in terms of explanatory power over total variation in the cash ratios.
Keywords: Corporate finance; Cash holdings; Precautionary saving motive; Corporate governance; Agency problem
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.