I exploit sharply nonlinear funding rules for defined benefit pension plans in order to identify the dependence of corporate investment on internal financial resources in a large sample. Capital expenditures decline with mandatory contributions to defined benefit pension plans, even when controlling for correlations between the pension funding status itself and the firm’s unobserved investment opportunities. The effect is particularly evident among firms that face financing constraints based on observable variables such as credit ratings. Investment also displays strong negative correlations with the part of mandatory contributions resulting solely from unexpected asset market movements.

The average cash to assets ratio for U.S. industrial firms increases by 129 % from 1980 to 2004. Because of this increase in the average cash ratio, firms at the end of the sample period can pay back all of their debt obligations with their cash holdings, so that the average firm has no leverage when leverage is measured by net debt. This change in cash ratios and net debt is the result of a secular trend rather than the outcome of the recent buildup in cash holdings of some large firms, but is more pronounced for firms that do not pay dividends. The average cash ratio increases over the sample period because firms change: their cash flow becomes riskier, they hold fewer inventories and accounts receivable, and are increasingly R&D intensive. The precautionary motive for cash holdings appears to explain the increase in the average cash ratio. Considerable media attention has been devoted to the increase in cash holdings of U.S. firms. For instance, a recent article in the Wall Street Journal states that “The piles of cash and stockpile of repurchased shares at [big U.S. companies] have hit record levels”. 1 In this paper, we investigate how the cash holdings of American firms have evolved since 1980 and whether existing models of cash holdings help explain this evolution. We find that there is a secular increase in the cash holdings of the typical firm from 1980-2004. In a regression of the average cash-to-assets ratio on a constant and time, time has a

In this paper, we investigate how corporate governance impacts firm value by examining both the value and the use of cash holdings in poorly and well governed firms. Cash represents a large and growing fraction of corporate assets and generally is at the discretion of management. We use several measures of corporate governance and show that governance has a substantial impact on firm value through its impact on cash: $1.00 of cash in a poorly governed firm is valued by the market at only $0.42 to $0.88, depending on the measure of governance. Good governance approximately doubles this value of cash. Furthermore, governance has a significant impact on how firms use cash. We show that firms with poor corporate governance dissipate cash quickly and in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed. All of our results hold after controlling for the level of acquisitions undertaken by cash rich firms, indicating that acquisitions are not solely responsible for the value destruction in poorly governed, cash rich firms. The findings presented in this paper provide direct evidence of how governance can improve or destroy firm value and insight into the importance of

We survey 1,050 Chief Financial Officers (CFOs) in the U.S., Europe, and Asia to directly assess whether their firms are credit constrained during the global financial crisis of 2008. We study whether corporate spending plans differ conditional on this survey-based measure of financial constraint. Our evidence indicates that constrained firms planned deeper cuts in tech spending, employment, and capital spending. Constrained firms also burned through more cash, drew more heavily on lines of credit for fear banks would restrict access in the future, and sold more assets to fund their operations. We also find that the inability to borrow externally caused many firms to bypass attractive investment opportunities, with 86 % of constrained U.S. CFOs saying their investment in attractive projects was restricted during the credit crisis of 2008. More than half of the respondents said they canceled or postponed their planned investments. Our results also hold in Europe and Asia, and in many cases are stronger in those economies. Our analysis adds to the portfolio of approaches and knowledge about the impact of credit constraints on real firm behavior.

As liquidity became scarce and internal profits plunged, many firms were forced to rely on bank lines of credit during the 2008-9 financial crisis. Surprisingly, little is known about these credit facilities in general, let alone about their importance during a crisis. This paper investigates a unique dataset that describes how public and private firms in the U.S. and abroad use lines of credit during early 2009. Our analysis emphasizes the interaction between internal funds, external funds, and real decisions such as corporate investment and employment. Among other things, we find that firms that are “credit constrained ” (small, private, noninvestment grade, and unprofitable) have larger credit lines (as a proportion of assets) than their large, public, investment-grade, profitable counterparts both before and during the crisis. Constrained firms draw more funds from their credit lines and are more likely to face difficulties in renewing or initiating new lines during the crisis. The terms of credit lines facilities changed significantly with the crisis: maturities declined; and commitment fees and interest spreads went up for all firms, but particularly for constrained firms. Our evidence suggests that while being profitable helps firms establish credit lines, it does not monotonically lead to increased use. Instead, lines of credit are used when internal funds (cash stocks and cash flows) decline. Looking at real-side decisions, our estimates suggest that lines of credit provide the liquidity “edge ” firms need to invest during the crisis. Key words: Financial crisis, investment spending, liquidity management, lines of credit, financial constraints. JEL classification: G31. *We thank James Choi and Jean Helwege for their suggestions. We also benefited from comments from seminar participants at the University of Amsterdam and at the RFS/Yale Financial Crisis Conference. We thank CFO magazine for helping us conduct the survey, though we note that our analysis and conclusions do not necessarily reflect those of CFO. We thank Benjamin Ee for excellent

This article uses managerial control rights data for over 5000 firms from 31 countries to examine the net costs and benefits of cash holdings. We find that when external country-level shareholder protection is weak, firm values are lower when controlling managers hold more cash. Further, when external shareholder protection is weak we find that firm values are higher when controlling managers pay dividends. Only when external shareholder protection is strong do we find that cash held by controlling managers is unrelated to firm value, consistent with generally prevailing U.S. and international evidence. (JEL G32, G34, G35) 1.

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We develop a framework for obtaining Fully Polynomial Time Approximation Schemes (FPTASs) for stochastic univariate dynamic programs with either convex or monotone single-period cost functions. Using our framework, we give the first FPTASs for several NP-hard problems in various fields of research such as knapsack-related problems, logistics, operations management, economics, and mathematical finance.

We show that, under standard assumptions about technology and production costs, financially constrained firms may have incentives to speculate as well as to hedge. Within the context of an industry equilibrium, we show that a firm’s risk management choice depends on the choices of its competitors, and in equilibrium even identical firms may choose di¤erent hedging strategies. Industry characteristics, such as the number of firms in the industry, the size of the market, the elasticity of demand, and marginal production costs determine how many firms hedge and how many …rms do not hedge in equilibrium. Even if hedging strategies are continuous, the typical equilibria are corner solutions, in which some …rms remain completely unhedged and others hedge to the maximum possible extent. Our results are consistent with several stylized facts documented in surveys and recent empirical work, and generate new testable hypotheses concerning the determinants of hedging strategies in an industry context.

This paper empirically studies how corporate cash holdings affect product market decisions. Using U.S. intra-industry data from 1971 to 2005, the analysis reveals that larger relative-to-rivals cash reserves lead to systematic future market share gains that obtain at the expense of industry rivals. Noteworthy, this “competitive ” effect of cash turns out to be magnified when rivals face tighter financing constraints and when firms intensively interact in their product market. From a different perspective, the analysis further demonstrates that firms ’ cash policy plays a significant pre-emptive role that distorts rivals ’ financial and real decisions. Specifically, consistent with a deterrence effect of deep pockets, I find that incumbents ’ cash reserves significantly curb the entry of potential competitors. In a similar vein, cash holdings considerably hamper the expansion of rivals by constraining both their investment and acquisition policies. Overall, my results provide compelling evidence firm’s cash policy encompasses a substantial and valuable strategic dimension