The Impact of Agency Costs on Corporate Cash Holdings. A Study of German Public and Private Tech Companies

Abstract: Purpose: The main objective of this thesis is to examine the effect different drivers of agency costs have on corporate cash holdings in public and private German technology firms. The analysis identifies three potential sources of agency costs. By determining target cash levels first and then obtaining deviations from these targets, the influences of agency costs are measurable. Data Set: The sample consists of 97 public firms, which were identified through the Deutsche Börse AG stock exchange, and 21 private firms, which were identified through the Bureau van Dijk’s Orbis database. Financial and non-financial information were then drawn from CapitalIQ for the period of 2004 to 2014. Further, TecDax data for this period complement the company information. Overall the sample contains 1240 unique observations. Methodology: The paper follows a quantitative approach where panel data regressions are estimated. In order to test how agency costs influence excess cash holdings, three distinct models are utilized. The first is set up to prove that firms do have cash targets. The second determines the level of these cash targets. Deviations from these cash targets are defined as excess cash. In the third model, excess cash holdings are then explained by the three drivers of agency costs. Results: The study finds that agency costs do exist and significantly influence a firm’s cash holding decision. Threat of takeovers, corporate governance quality, and bank power are shown to be jointly significant. With an increase of these variables agency costs decline and so does excess cash.