Rohan Williamson

The determinants and implications of corporate cash holdings

Abstract We examine the determinants and implications of holdings of cash and marketable securities by publicly traded U.S. firms in the 1971–1994 period. In time-series and cross-section tests, we find evidence supportive of a static tradeoff model of cash holdings. In particular, firms with strong growth opportunities and riskier cash flows hold relatively high ratios of cash to total non-cash assets. Firms that have the greatest access to the capital markets, such as large firms and those with high credit ratings, tend to hold lower ratios of cash to total non-cash assets. At the same time, however, we find evidence that firms that do well tend to accumulate more cash than predicted by the static tradeoff model where managers maximize shareholder wealth. There is little evidence that excess cash has a large short-run impact on capital expenditures, acquisition spending, and payouts to shareholders. The main reason that firms experience large changes in excess cash is the occurrence of operating losses.

Culture, openness, and finance

Religions have little to say about shareholders but have much to say about creditors. We find that the origin of a countrys legal system is more important than its religion and language in explaining shareholder rights. However, a countrys principal religion helps predict the cross-sectional variation in creditor rights better than a countrys openness to international trade, its language, its income per capita, or the origin of its legal system. Catholic countries protect the rights of creditors less than other countries, and long-term debt is less important in these countries. A countrys openness to international trade mitigates the influence of religion on creditor rights. Religion and language are also important predictors of how countries enforce rights.

Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences

We construct a firm-level governance index that increases with minority shareholder protection. Compared to U.S. matching firms, only 12.68% of foreign firms have a higher index. The value of foreign firms falls as their index decreases relative to the index of matching U.S. firms. Our results suggest that lower country-level investor protection and other country characteristics make it suboptimal for foreign firms to invest as much in governance as U.S. firms do. Overall, we find that minority shareholders benefit from governance improvements and do so partly at the expense of controlling shareholders.

Exchange rate exposure and competition: evidence from the automotive industry ☆

Financial theory predicts that a change in the real exchange rate should affect the value of a multinational firm. To a large extent, past empirical research has not supported this theory. This study discusses and evaluates the effect of real exchange rate changes on a multinational firm and a global competitor and incorporates the effect of industry competition on the relation between exchange rates and firm value. In order to better test the hypothesis and address the shortcomings of previous studies, tests are conducted using a sample of automotive firms from the U.S., Japan and Germany. The analysis is done at the country specific portfolio level as well as the firm specific level. Consistent with the hypothesis, I find significant rate exposure to exchange rate shocks. Moreover, there is evidence of time variation in exchange rate exposure which is consistent with a change in the competitive environment within the industry. Finally, evidence is presented that is consistent with the hedging value of a firm producing in the export market, but only after production exceeds a certain level of sales in the export market.

Financial Expertise of the Board, Risk Taking, and Performance: Evidence from Bank Holding Companies

Financial expertise among independent directors of U.S. banks is positively associated with balance-sheet and market-based measures of risk in the run-up to the 2007–2008 financial crisis. While financial expertise is weakly associated with better performance before the crisis, it is strongly related to lower performance during the crisis. Overall, the results are consistent with independent directors with financial expertise supporting increased risk taking prior to the crisis. Despite being consistent with shareholder value maximization ex ante, these actions become detrimental during the crisis. These results are not driven by powerful chief executive officers who select independent financial experts to rubber stamp strategies that satisfy their risk appetite.

How Much do Banks use Credit Derivatives to Reduce Risk

This paper examines the use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2003 only 19 large banks out of 345 use credit derivatives. Though few banks use credit derivatives, the assets of these banks represent on average two thirds of the assets of bank holding companies with assets in excess of

Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relation Between Corporate Governance and Shareholder Wealth

1 billion. Few banks are net buyers of credit protection and disclose using credit derivatives to hedge loans. Banks are more likely to be net protection buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios. The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a banks loan portfolio and negatively or not related to other types of bank loans. The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks.

Do Independence and Financial Expertise of the Board Matter for Risk Taking and Performance

We compare the governance of foreign firms to the governance of similar U.S. firms. Using an index of firm governance attributes, we find that, on average, foreign firms have worse governance than matching U.S. firms. Roughly 8% of foreign firms have better governance than comparable U.S. firms. The majority of these firms are either in the U.K. or in Canada. When we define a firms governance gap as the difference between the quality of its governance and the governance of a comparable U.S. firm, we find that the value of foreign firms increases with the governance gap. This result suggests that firms are rewarded by the markets for having better governance than their U.S. peers. It is therefore not the case that foreign firms are better off simply mimicking the governance of comparable U.S. firms. Among the individual governance attributes considered, we find that firms with board and audit committee independence are valued more. In contrast, other attributes, such as the separation of the chairman of the board and of the CEO functions, do not appear to be associated with higher shareholder wealth.

Did New Regulations Target the Relevant Corporate Governance Attributes

During the recent financial crisis, financial expertise among independent directors of commercial banks is negatively related to changes in both firm value and cumulative stock returns. Furthermore, financial expertise is positively associated with risk-taking levels in the run-up to the crisis using both balance-sheet and market-based measures of risk. These results are not driven by powerful CEOs who select independent experts to rubber stamp strategies that satisfy their risk appetite. They are, however, consistent with independent directors with financial expertise recognizing the residual nature of shareholders’ claim and supporting a heightened risk profile for their bank.

Cash Stockpiles and Investment: Do Cash-Rich Firms Use Cash in Acquisitions?

Recent corporate scandals have led to new governance rules that include the Sarbanes-Oxley legislation (SOX) and additional regulations by stock exchanges. This study examines the changes in corporate governance practices during 2001-2005, which covers the period before and after the new regulations. We analyze a comprehensive set of 64 governance attributes for more than 5,200 firms. Our findings indicate that corporate governance practices beyond those mandated by new regulations changed substantially over this period. We find statistically significant differences in governance across firm size and industries. After controlling for size and industry we find a positive and significant relation between governance and firm value. We find that new regulations are associated with higher firm value in firms that adopted the regulations prior to them being mandated. The results are statistically and economically significant. In this sense our findings suggest that the new regulations did target relevant governance attributes. However, the analysis also indicates that the markets were already rewarding firms that had better governance. Therefore, it is not clear that mandatory rules for all firms were required. Clearly the costs of imposing new regulations on certain types of firms, for example, small firms, were potentially too costly. In the post-regulatory period, as expected, the relationship between the regulatory governance attributes and firm value does not exist. We find that the positive relationship between governance attributes not mandated by regulations and firm value continues even in the post-regulatory period.