Firms cash management, adjustment cost and its impact on firms’ speed of adjustment: a cross country analysis

Abstract

We investigate the firms’ specific attributes that determine the difference in speed of adjust-

ment (SOA) towards the cash holdings target in the Scandinavian countries: Denmark,

Norway and Sweden. We examine whether Scandinavian firms maintain an optimal level

of cash holdings and determine if the active cash holdings management is associated with

the firms’ higher SOA and lower adjustment costs. Our findings substantiate that a higher

level of off-target cost induces professional managers to rebalance their cash level towards

the optimal balance of cash holdings. Our results reveal that Scandinavian firms accelerate

SOA towards cash targets primarily for the precautionary motive. Moreover, our results

show that SOA is heterogeneous across Scandinavian firms based on adjustment cost and

deviate cash holdings towards the target mainly with the support of internal financing. Fur-

thermore, our empirical findings show that the SOA of Norwegian firms is significantly

higher than the Danish and Swedish firms.

Keywords Cash holdings· Speed of adjustment· Trade-off theory· Scandinavian

countries· GMM