Dubois, Michel

2009, Frésard, Laurent, Dubois, Michel

This dissertation is constituted of three distinct chapters. The first chapter focuses on the real consequences of cash policy by examining how cash holdings influence firms’ behavior and performance in their product market. The paper provides compelling evidence that corporate cash policy encompasses a substantial strategic dimension. In particular, the analysis reveals that larger relative-to-rivals cash reserves lead to systematic future market share gains at the expense of industry rivals. Notably, the documented effect is exacerbated when rivals face tighter financing constraints and when firms interact intensively in their product market. Moreover, the competitive effect of cash contributes to increase firm value and operating performance. Cash-rich firms partly gain market shares by drawing down their reserves to increase capital and R&D investment, as well as to expand their work force. From a different perspective, firms’ cash policy significantly distorts rivals’ product market decisions. Particularly, the analysis shows that incumbents’ cash reserves restrain the entry of potential competitors and hamper the expansion of rivals by curbing both their investment and acquisition policies. The second chapter sheds new light on the process whereby firms accumulate their cash reserves, i.e. their savings decisions. Remarkably, the investigation illustrates that stock prices, and more importantly, the private information they contain, play a crucial role in explaining firms’ savings choices. I start by documenting that a firm’ savings are highly sensitive to its stock price. This positive association indicates that firms tend to transfer more resources into their cash balances when the market foresees valuable future prospects. Strikingly, such a precautionary mechanism turns out to be amplified when the market price contains a larger content of private investors’ information. Hence, the findings are consistent with the view that managers learn from observing the level of their stock price. Moreover, further test show that this defensive learning is not due to the uncaptured effect of market mispricing or financing constraints. Overall, the analysis importantly highlights that the nature and precision of the available information about firms’ future prospects are crucial ingredients of their saving choices. The last chapter takes a corporate governance perspective and investigates the effect of a U.S. cross-listing on the risk that cash holdings are channeled into value destroying ventures. In a nutshell, the analysis reveals that the potential for value destruction embodied in large cash positions is significantly lessened when foreign firms benefit from the strength of U.S. institutions and monitoring environment. Indeed, investors systematically place a valuation premium on the excess cash of foreign firms that cross-list on U.S. markets compared with that of their domestic counterparts. The uncovered excess cash premium turns out to be magnified for firms established in countries in which shareholder protection is weak. Also, in spite of a host of initiatives to develop governance quality worldwide, the valuation differential significantly persists over time and is still at work nowadays. In addition, the analysis further dissects the results and put in light that two complementary forces explain the excess cash premium of cross-listed firms. On one hand, investors perceive the strength of U.S. legal environment as effective to tie managers’ hand. On the other hand, the additional scrutiny by analysts and large investors that is associated with a U.S. listing also enhances investors’ confidence that cash holdings will not be dissipated.