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Cash holdings and leverage of German listed firms – Evidence from 1992 to 2011
We examine cash holdings and leverage levels of German listed (non-financial and non-utility) firms. We document a secular increase in cash ratios over the last twenty years (1992–2011), reducing the net debt book leverage ratio for the average sample firm close to zero. Using prediction models with standard firm characteristics, our results suggest a fundamental change in firms’ financial policies: In the second half of the sample period, both established firms and IPO firms exhibit substantially higher (lower) cash (net debt leverage) levels than predicted. The unexpected changes among established firms are associated with measures of uncertainty faced by firms. Our results suggest that German firms have increased (reduced) their cash (net debt leverage) levels over time in order to adopt more precautionary financial policies.
1 Introduction
Deciding on cash holdings and the level of debt are central to a firm’s financial management. Over the last 20 years (1992–2011) German firms have – similar to US firms – substantially increased their cash holdings and kept their leverage ratios fairly constant. Indeed, as Figure 1 illustrates the average German listed firm outside the financia...