International evidence on the non-linear impact of leverage on corporate cash holdings

Aydin Ozkan, Yilmaz Guney, Neslihan Ozkan

Research output: Contribution to journalArticle

45 Citations (Scopus)


This paper investigates cash holding behaviour of firms from France, Germany, Japan, the UK and the US using data for 4069 companies over the period 1996-2000. Our focus is particularly on the relation between cash holdings and leverage. We argue that the impact of leverage on cash balances of firms is likely to be non-monotonic. To the extent that leverage of firms acts as a proxy for their ability to issue debt one would expect a negative (substitution effect) relation between leverage and cash holdings. However, as leverage increases firms are likely to accumulate larger cash reserves to minimise the risk of financial distress and costly bankruptcy. Thus, one would expect a positive (precautionary effect) relationship between cash holdings and leverage at high levels of leverage. Our findings provide strong and robust support for a significant non-linear relation between cash holdings and leverage. Additionally, our results show that the impact of leverage on cash holdings partly depends on country-specific characteristics such as the degree of creditor protection, shareholder protection, and ownership concentration.

Original languageEnglish
Pages (from-to)45-60
Number of pages16
JournalJournal of Multinational Financial Management
Issue number1
Publication statusPublished - 1 Feb 2007
Externally publishedYes


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