Dr Wenyi Sun

We study the implications of financial hedging for corporate cash policy and the value of cash holdings. Using a web crawler program to collect data on the use of financial derivatives between 1993 and 2016, we find that US public firms with financial hedging programs have smaller cash reserves but a higher value of cash than firms without hedging contracts in place. Our empirical results are robust when controlling for potential endogeneity issues, corporate governance, cash regimes and alternative measures of cash holdings. Further, we find that financial hedging not only increases the investment sensitivity to internal cash, but also has a positive effect on investment efficiency. The positive effect of financial hedging on the value of cash is more pronounced for firms with more financial constraints, higher information asymmetry and weaker corporate governance. Collectively, our paper highlights the importance of corporate cash policy as a channel through which financial risk management increases firm value.

This study examines how CEO ownership affects the motivation of firms to hold cash. We document a monotonic and positive relationship between CEO ownership and cash holdings. The effect is more pronounced for firms with higher firm-specific risk and larger external financing costs, suggesting that CEO ownership encourages firms to hold more cash as precautionary savings. However, we find no evidence that CEO ownership leads to cash hoarding in firms with weak corporate governance. Moreover, we show that firms with high CEO ownership and excess cash holdings have more capital expenditures and R&D expenses but do not have higher dividend payments and share repurchases. Nonetheless, shareholders’ perceived value of cash increases with CEO ownership, indicating that shareholders place a positive value on high levels of cash holdings associated with CEO ownership in the context of growing investment prospects. Overall, our findings support the notion that firm ownership aligns the interests of CEOs and shareholders, rather than encouraging managers to extract private benefits through hoarding cash.