Cash Holdings, Secured Debt and Collateral

Sammanfattning: The purpose of this study is to empirically investigate the relationship between unencumbered tangibility and cash holdings, and to evaluate if corporations consider them to be substitutable variables of corporate liquidity. The study relies on a panel data set and then employs a firm fixed effect regression model to estimate the strength and direction of the relationship of interest. It then proceeds by dividing up the sample into financially constrained and unconstrained firms to compare the effect this has on the relationship in question. Finally, the sample is divided based on the external credit market conditions of each year. The theoretical background of this study is based on the established literature on the motives for corporate cash holdings and is complemented with a treatment of the characteristics of secured debt and collateral. The sample consists of annual data for firms listed on major US exchanges between 2013-2022. The study finds a statistically and economically significant inverse relationship between unencumbered tangibility and corporate cash holdings. Additionally, it finds that the relationship is amplified by the presence of financing constraints. Taken together, the findings confirm that unencumbered tangibility is a determinant of cash holdings. They also suggest that firms may compensate for the loss of financial and operational flexibility associated with secured debt by holding more cash, which is in accordance with the precautionary motive for cash holding.