The thesis empirically investigates the motivation, perception and value of cash holdings
in the UK setting over the period 1980 to 2017. The study is motivated by the marked
increase in cash holdings among UK firms, the trend in cash holdings has been subject to
media and academic coverage. The research provides an empirical explanation for the
upward trend in cash holdings by UK listed companies. In addition, I evaluate how the
cash holdings of firms are perceived by the market during corporate investment
announcements. The study addresses how cash is valued and in particular, if cash-rich
firms outperform cash-poor firms in the stock market and if this effect heightens during
periods of high economic uncertainty. The empirical analyses in this study are conducted
using a combination of difference in differences (DiD) regression, Two-stage least
squares (2SLS) regression, Fama-Macbeth regression and ordinary least squares (OLS)
as the estimation techniques. The results indicate that firms increase cash holdings in
response to increased competition, the increase in cash holdings is more pronounced
among firms exposed to high predatory threat and financing frictions. Furthermore, cash rich firms make gains in the product market at the expense of their rivals. The gains in
market share as a result of increased cash holdings is amplified among firms with low
exposure to predatory threat and financing frictions. Also, since cash may convey
important price sensitive information about the future strategic direction of a firm, I use
a sample of 3,251 corporate investment announcements by firms listed on the London
Stock Exchange over the period 2005-2016 and demonstrate that higher cash holdings at
announcement results in increased market valuation of corporate investments. The
relationship between cash holdings and market valuation of corporate investment
becomes negative at higher levels of cash holdings. The results also reveal that the
positive impact of cash holdings is more noticeable for organic investment
announcements, particularly R&D. Lastly, I examine the market performance of a
portfolio of abnormally high cash holding firms compared to a portfolio of abnormally
low cash holding firms. The results suggest that the portfolio of abnormally high cash
holdings outperforms their counterpart. The outperformance increases during periods of
increased economic uncertainty. The results of this thesis have important implications for
the cash holdings literature, market participants and policymakers. Firstly, the increase in
cash holdings indicates limitations in the ease of accessing finance in the capital market.
This points to the need to reform the existing opaque capital market to accommodate the
needs of disadvantaged companies. Similarly, the increase in cash holdings during
periods of increased competition intensity further reinforces the argument of an opaque
capital market. It appears that the problem of financial constraint is amplified during
periods of increased competition. To mitigate this anomaly, regulators could enact laws
that lessen the financing deficit during such periods. Since high cash holdings have an
important bearing on a firm’s market performance, shareholders and other stakeholders
can pursue activist policies that actively monitor firm cash holdings policies which
maximises firm value.Edinburgh Business Schoo
