Corporate cash holdings: Evidence from Switzerland

This paper investigates the determinants of a broad sample of Swiss non-financial firms' cash holdings between 1995 and 2004. The median Swiss firm holds almost twice as much cash and cash equivalents as the median U.S. or U.K. firm. Our results indicate that asset tangibility and firm size are both negatively related to cash holdings and that there is a non-linear relationship between the leverage ratio and liquidity holdings. Dividend payments and operating cash flows are positively related to cash reserves, but we cannot detect a significant relationship between growth opportunities and cash holdings. Most of these findings, but not all of them, can be explained by the transactions and/or the precautionary motive. Dynamic panel estimation indicates that Swiss firms adjust their liquidity holdings only slowly towards an endogenous target cash ratio. Looking at the firms' corporate governance structures, we document a non-linear relationship between managerial ownership and cash holdings, indicating an incentive alignment effect and an opposing effect related to increasing risk aversion. Finally, our results suggest that firms in which the CEO simultaneously serves as the COB hold significantly more cash.