The asymmetry in firms’ mechanisms of cash holdings adjustments: evidence from the G-5 economies

Using a G-5 country sample (France, Germany, Japan, the UK, and the US) from 1980 to 2007, I find new evidence of the asymmetry in firms’ mechanisms of cash holdings adjustments. They undertake different approaches to move toward their target cash holdings levels conditional on whether they have below- or above-target cash holdings. Specifically, firms with above-target cash holdings adjust mainly via changes in cash flows from financing and investing. They generally reduce their levels of equity proceeds, net debt issues and fixed asset disposal but increase their levels of equity repurchases, dividend payout, net assets from acquisitions, portfolio and short-term investments, and capital expenditures. However, firms with below-target cash holdings adjust mainly via changes in operating cash flows, i.e., they increase their levels of funds from operations but reduce their levels of working capital. The mechanisms undertaken by firms with above-target cash holdings allow them to adjust toward their target cash holdings relatively faster than those with below-target cash holdings, as they possibly incur lower costs than the mechanisms experienced by firms with below-target cash holdings. The results highlight the importance of understanding the asymmetry in firms’ mechanisms of cash holdings adjustments when analyzing how they adjust toward their target cash holdings levels.