Teorías del Desarrollo

The following sub-sections de…ne the theoretical framework and variables de…nition which are implemented in this chapter.

3.3.1 Theoretical framework

Chapter 3 follows the empirical model of cash holdings which is de…ned in Gao et al. (2013). The model which is a static linear model considers that cash reserves adjust immediately 53_{According to the authors, this model allows one to bound predicted values between zero and one while}

also controlling for unobserved heterogeneity. Thus, the dependent variable presents a value between 0 and 1.

to changes in the explanatory variables. The model assumes that cash holdings can be

taken as a function of several …rm-speci…c characteristics X , of …rm i at time t and a

disturbance error term. The static linear model takes the following general form:

Cashit= 0+ k

X

k=1

1;kXit+"it (3.1)

Where, …rms are represented by subscripti= 1; :::; N,trepresents time byt= 1;2; :::T.

Cash_it is the ratio of cash holdings, Xit is the vector of the explanatory variables. "it is

the error term which is composed by …ve components: i as a …rm-speci…c e¤ect, twhich

is a time-speci…c e¤ect, j is an industry-speci…c e¤ect, k is an country-speci…c e¤ect

and lastly "it is an idiosyncratic component. It is also assumed that i are unobservable

but have a signi…cant e¤ect on cash reserves and that t varies through time but is the

same for all …rms in a given year. It captures the economic factors like prices which are outside the control of …rms.

It should be noted, however, that in equation (3.1) there is no adjustment process. In reality, though, markets are imperfect and transaction and adjustment costs exist. Following previous literature (Ozkan and Ozkan, 2004; Bigelli and Sánchez-Vidal, 2012), this chapter also takes into account this issue. The adjustment process involves a lag in adjusting to changes in the target cash structure (Ozkan and Ozkan, 2004). In this scenario, cash reserves do not instantly adjust to changes in the explanatory variables. It is assumed that …rms pursue a target level when making their cash reserves’ decisions.

The level of cash which is achieved at time t is also explained by the decisions which are

taken at timet 1. The model is determined as follows:

Cash_it= 0+ k

X

k=1

1;kXit+"it (3.2)

Where, …rms are represented by subscripti= 1; :::; N,trepresents time byt= 1;2; :::T.

i. Cashit is the optimal cash ratio, Xit is the vector of the explanatory variables. "it

is the error term. In this scenario, …rms adjust their cash holdings to be closer to their target cash ratio. This leads to a partial adjustment cash level. The equation takes the following format:

Cashit Cashit 1= (Cashit Cashit 1) (3.3)

WhereCashitis the actual cash ratio. The coe¢ cient measures the rate of adjustment

to the target cash holdings and it is expected to lie between 0 and 1. If = 1, …rms adjust

their cash levels to the optimal level immediately. In a scenario of = 0, …rms’ cost of

adjustments are so high that they are not able to modify their investment in liquid assets

from the actual to the target level of cash. The reduced form of the cash holdings’equation is obtained by replacing equation 3.2 into equation 3.3. The …nal model is de…ned below:

Cashit= 1+ 0Cashit 1+ k

X

k=1

kXit+"it (3.4)

where, 1 = 0 ; 0 = (1 ); k = 1;k ; "it is the error term. Since the adjustment

speed is determined by 1 0, a higher value of 0 indicates a lower adjustment speed.

3.3.2 Variables de…nition

Following the literature (Akguc and Choi, 2013; Gao et al., 2013), the dependent variable cash holdings is de…ned as the ratio of cash and equivalents to total assets. The main variable of interest in this chapter is the private dummy. It assumes the value of 1 if …rms are private and , 0 otherwise. It is expected that private …rms hold higher levels of cash than their public counterparts. The former su¤er from higher levels of information asymmetry and have a more restricted access to external markets (Akguc and Choi, 2013). Please refer to Chapter 2, sub-section 2.6.2 for details on the construction of this variable. A set of control variables are also included in the regression model based on the pre- vious literature (Akguc and Choi, 2013; Gao et al., 2013; Hall et al., 2014). They are as follows: cash ‡ow, leverage, net working capital, capital expenditures, …rms’ size, cash ‡ow volatility, sales growth and …rms’age. The de…nition of these variables are provided in the next paragraphs.

The variable cash ‡ow is measure based on the cash ‡ow of the …rms. The majority of the previous studies …nd a positive relation with cash reserves (Opler et al., 1999; Ozkan and Ozkan, 2004; Gao et al., 2013). This is consistent with the idea behind the pecking order theory. Firms’ prefer to obtain …nance through internal sources before accessing external markets. In other words, if operating cash ‡ows exceed investment needs, …rms repay debt and/or accumulate cash (Opler et al., 1999).

The variable leverage is calculated as …rms’total debt. Previous studies show a negative relation between leverage and cash holdings (Opler et al., 1999; Akguc and Choi, 2013). Brav (2009) provides evidence that Private …rms are highly leveraged and have a higher proportion of short-term debt to total debt when comparing with their public counterparts. This negative relation is explained under the pecking order theory. When investment exceeds retained earnings debt grows, and therefore, cash reserves decrease (Pastor and Gama, 2012).

Net working capital is obtained as the di¤erence between current assets and current liabilities excluding cash. This variable is a proxy for cash’substitute (Opler et al., 1999). Previous studies …nd a negative relation with cash holdings (Bates et al., 2009; Bigelli and Sánchez-Vidal, 2012). In addition, Chapter 3 follows the work of Erel et al. (2015)

to de…ne capital expenditures since Amadeus database does not provide information on this variable. Thus, capital expenditures variable is measured as the change in …xed assets plus depreciation. Kim et al. (1998) and Dittmar et al. (2003) refer that cash balances are the outcome of investment decisions (i.e. capital expenditures) which are made by the …rm. Investment improves collateral and borrowing capacity leading to a reduction of the costs associated with external markets. As a result, a negative relation between cash and capital expenditures is expected.

Moreover, …rms’size is measured as the logarithm of total assets. Previous studies …nd that the variable size has a negative e¤ect on …rms’cash holdings (Opler et al., 1999; Gao et al., 2013) which is in line with the trade-o¤ theory. Since there are economies of scale in cash management, larger …rms are expected to be able to obtain …nance easier. Thus, the trade-o¤ theory may predict lower cash reserves for private …rms.

Cash ‡ow volatility is calculated as the standard deviation of industry-median-adjusted yearly cash ‡ow over the previous three years. It is included to control for the …rms’risk. Previous studies …nd a positive relation with cash reserves (Bates et al., 2009; Bigelli and Sánchez-Vidal, 2012). Firms which are in industries associated with a large increase in the idiosyncratic risk hoard more cash.

The variable sales growth is calculated as the change in total sales. It accounts for the growth opportunities of the …rms. Previous empirical studies …nd a positive relation between cash and …rms’growth opportunities (Bigelli and Sánchez-Vidal, 2012; Gao et al., 2013). According to Myers (1984), …rms which are largely determined by their growth opportunities su¤er from higher levels of information asymmetry. This indicates that these …rms are also characterised by higher external …nancing costs. Finally, …rms’ age is calculated as the di¤erence between the present year and …rms’date of incorporation. The relation between cash and age should be a negative one. Younger …rms tend to have weaker associations with corporate stakeholders (Almazan et al., 2009).

Finally, with the exception of size, cash ‡ow volatility and sales growth all variables are divided by total assets. All Euro variables are also adjusted using the CPI at the 2005 price level.