A penny saved

Abstract: Abstract Title: A penny saved: Do cash holdings reduce profitability? Seminar date: May 25, 2016 Course: FEKN90, For the degree of: Master of Science in Business and Economics, 30HP Authors: Andreas Lagerstedt, Oscar Ljunggren Westlundh, Truls Törnqvist Advisor: Anna Glenngård Keywords: Cash holdings, profitability, Stockholm stock exchange, overinvestment, Jensen’s free cash flow hypothesis. Purpose: The overall purpose of this study is to investigate if profitability is negatively affected by cash holdings for firms on the Swedish market. The study will also determine if there are any differences in this aspect before, during and after the financial crisis of 2008-2009. Methodology: This study uses a quantitative and deductive method using panel data. Data was mainly gathered using Thomson reuters datastream. The regression method is Ordinary Least Squares and is performed using eViews. Theoretical perspectives: The theoretical perspective is based on costs associated with the principal-agent problem described in Jensen's free cash flow hypothesis (1986). Empirical foundation: This study is based on 108 firms listed on the Stockholm stock exchange and covers the years 2004-2014. Profitability is the dependent variable and the variable investigated is cash holdings. Additional independent variables included are leverage, size and Tobin’s Q. Conclusions: The regression showed that no significant relationship between cash holdings and profitability could be found. No significant difference in this relationship could be found between the time periods before, during and after the financial crisis.