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Question 1 - Briefly explain what each of the following theories says about corporate cash holdings:

  • The static tradeoff theory:
  • Information asymmetry.
  • The agency costs of debt.
  • Managerial agency theory.
  • The financing hierarchy model (also known as the pecking order model)

Compustat Code

Description

GVKEY

Global Company Key

ACT

Current assets-total

AQC

Acquisitions

AT

Assets-total

BKVLPS

Book value per share

CAPX

Capital expenditure

CH

Cash

DLC

Debt in current liabilities-total

DLTT

Long-term debt-total

DP

Depreciation and amortization

DVC

Dividends common/ordinary

EBIT

Earnings before interest and taxes

LCT

Current liabilities-total

SALE

Sales/turnover (Net)

TXT

Income taxes-total

XRD

Research and development expense

PRCC_F

Price close-annual-fiscal

Table I: Description of the data in Assignment Data.xlsx.

Question 2 - Table II provides the construction rules for the variables you will use to test the competing explanations for corporate cash holdings. You should verify that the variable definitions there agree substantially with those in Table 1 of Opler et al. (1999). Now, construct the variables described in Table II, and present their summary statistics in the same format as Table 1 in Opler et al. (1999). You will not require the variables Dividend dummy, Truncated cash/assets, Payout to shareholders or Industry sigma for this analysis, so they should not appear in your table of summary statistics.

Variable in Opler et al. (1999)

Construction Rule

Cash/assets

CH/AT

Real size

ln(AT)

Market-to-book ratio

PRCC F/BKVLPS

R&D/sales

XRD/SALE

Cash flow/assets

(EBIT-DP-TXT-DVC)/AT

Net working capital/assets

(ACT-LCT-CH)/AT

Capital expenditures/assets

CAPX/AT

Acquisitions/assets

AQC/AT

Total leverage

(DLC+DLTT)/AT

Dividend dummy

If DVC > 0 then 1 else 0

Table II: Construction of the variables used by Opler et al. (1999).

Question 3 - Use the variables described in Table II to replicate the regression tests documented in Table 4 of Opler et al. (1999). In detail, you should run a multivariable OLS regression, with the natural logarithm of Cash/assets as the dependent variable and the remaining variables in Table II as the independent variables. You do not need Industry sigma and Regulation dummy in your regressions.

Run OLS regressions. You should then construct a table that reports the regression coefficients and associated t-statistics for each independent variable. Discuss the following statements by Opler et al. (1999), with reference to the first column in their Table 4, and assess them in the light of your own results:

(a) "We find that cash holdings decrease significantly with size, net working capital, leverage, whether a firm pays dividends . . . . Cash holdings increase significantly with the cash flow-to-assets ratio, the capital expenditures-to-assets ratio, . . . and the R&D-to-sales ratio."

(b) ". . . the coefficients of the market-to-book, cash flow-to-assets, and the dividend dummy variables are consistent with the static tradeoff theory, as well as with the financing hierarchy model." (Your answer should explain what the tradeoff theory and the financing hierarchy model say about the signs of coefficients of the market- to-book, cash flow and dividend dummy variables.)

(c) "However, the coefficients of the size, capital expenditures, and R&D variables are more consistent with the static tradeoff theory than with the financing hierarchy model." (Your answer should explain what the tradeoff theory and the financing hierarchy model say about the signs of the coefficients of the size, capital expenditure and R&D variables.)

(d) "It is not clear that the financing hierarchy model has predictions for the sign of working capital . . . . The coefficients of these variables are consistent with the static tradeoff theory." (Your answer should explain what the tradeoff theory says about the sign of the coefficient of the working capital variable.)

References -

Hillier, D., M. Grinblatt, and S. Titman (2012). Financial Markets and Corporate Strategy (second European ed.). Maidenhead, Berkshire: McGraw-Hill Education.

Opler, T., L. Pinkowitz, R. Stulz, and R. Williamson (1999). The determinants and implications of corporate cash holdings. J. Finan. Econ. 52 (1), 3-46.

Attachment:- Assignment Files.rar

Applied Statistics, Statistics

  • Category:- Applied Statistics
  • Reference No.:- M93121358

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