Finance and Accounting
Evidence of cash conservative and low-leverage firms in UK and Germany
Data: UK and Germany(2005-2012) firms’ financial figures (equity, loans, cash in reserves etc. use data from ) http://ukdataservice.ac.uk/.
International Monetary Fund (IMF): the datasets include economic,
?nancial and government statistics;
Organization for Economic Co-operation and Developing (OECD):
among other items, the dataset include labor force, trade, national
account and economic statistics;
World Bank (WB): in particular you should look at the World
Development Indicators (WDI).
1 Describe the theory ?financially conservative policies;
2 Individuate a group (some groups) of fi?rms which are
3 Use test for diference in mean to test whether the
grouping criterion you have chosen works;
4 Build up a dummy and test whether some basic
relationships are di¤erent for this group of ?firms;
5 Use logit/probit/regression analysis to test the
alternative hypothesis that the group of fi?rms you have
selected is distressed/conservative.
The aim of this paper is threefold:
1 To de?fine fi?nancial conservatism;
2 To identify a sample of ?rms that adopt persistent ?nancial
3 To investigate the characteristics of conservative ?rms by focusing on
the role of agency problems (ownership characteristics) in affecting the
choice of a ffinancial conservative policy.
Policy of persistent high-cash reserves (Mikkelson and Partch 2003).
Motives for large cash reserves:
Serve shareholders?interests by providing low cost of ?financing (Almeida
2004, Myers and Majluf 1984);
Serve managers?interests by consuming private bene?ts easily (Jensen
Policy of persistent low-leverage levels (Minton and Wruck 2001).
Motives for low leverage:
Provides shareholders with fl?exibility in ?financing future investments
Protect managers against expected costs of ?financial distress (Berger et
Combine both aspects of ?financial conservatism.
Firms may want to attain fi?nancial ?flexibility by adopting both forms
of conservatism at the same time.
Consistent with Capital Structure Theories:
Pecking order theory: ?firms should ?first exhaust internally available
funds and then resort to more expensive external debt;
Agency theory: both FCP may coexist because managers may have
incentives to stockpile cash in order to avoid debt fi?nancing.
Consistent with the evidence that:
Firms with high growth opportunities and leverage-conservative are
cash rich (Kaplan & Zingales, 1998);
Financially (or leverage) constrained ?firms tend to hold large cash
reserves (Fazzari, Hubbard & Petersen, 1996).
Choose ?xed threshold levels of cash holdings and leverage to identify
fi?nancially conservative fi?rms:
A ?rm is said to be ?leverage conservative? if its annual ratio of total
debt to total assets belongs to the . . . first 20% of all fi?rms for ?five
consecutive years (Minton and Wruck 2001).
A ?rm is said to be ?cash conservative?if it holds annually more than
25% of its assets in cash and cash equivalents for fi?ve consecutive
years (Mikkelson and Partch 2003).
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