Firms' Cash Holdings and Performance: Evidence from Japanese corporate finance

This paper uses panel data from Japanese listed firms during 1980-2010 to analyze the factors that influence firms' cash holdings and determine whether cash holdings are related to corporate performance and values. It is demonstrated that firms have increased cash holdings because of the trend of higher cash flow uncertainty since the 1990s, and, especially in the 2000s, due to the continuous availability of low-cost funding. It is also shown that with large investment opportunities, the positive relationship between cash holdings and firms' returns on assets and values has weakened in recent years, although external investors have highly valued firms since 2008. It is implied that under a sudden deterioration in the economy, conservative cash holdings could temporarily increase firms' market values, but, in the long run, a highly conservative liquidity management policy would weaken firms' profitability on assets.