Corporate Cash Holdings and Shareholder Risk : Investigating the relationship between corporate cash holdings and the risk of stocks listed on the Stockholm Stock Exchange

University essay from Umeå universitet/Företagsekonomi; Umeå universitet/Företagsekonomi


Corporate cash holdings is a topic constantly under review, companies hoarding cash are criticized by shareholders who rather have companies using their cash for new investments or dividend payouts. Recent academic research has discovered that levels of cash holding are high in times when risk is deemed to be high and found that levels of corporate cash holdings are substantially higher than they used to, making more coverage and a better understanding of the phenomenon crucial. This thesis is investigating an aspect of the interconnection between corporate cash holdings and shareholders by examining if there is a relationship between the level of corporate cash holdings and the risk of the company stock. This research is conducted on the Stockholm Stock Exchange during the four year period of 2009-2012 and investigates for a relationship not only on the entire stock exchange but also for each size and sector individually. In order to investigate this relationship a cash to assets ratio has been employed to represent the level of corporate cash holdings and the measures of stock beta and volatility are used to represent the risk of the stock. The cash holding ratio is tested for a relationship with both beta and volatility separately using the Spearman’s rank correlation coefficient. This thesis have adopted a quantitative research and implemented an archival research strategy by using official records and numbers. Through these statistical tests this thesis establishes significant relationships between both the cash holding ratio and stock beta and stock volatility separately for the entire stock exchange and some differences arises between different sizes and sectors. For cash holding and stock beta a negative correlation relationship has been discovered for the entire sample, the medium cap size and the health care and industrial sectors. For cash holdings and stock volatility positive correlation findings have been made for the entire sample as well as the small cap size and the sectors of basic materials, health care and technology. This finding implicates that cash holdings to some extent relates stock risk and several potential explanations to this relationship are given and connected to well-established financial theories. 

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