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Index changes and cash policy.

Abstract

This paper studies the change in the cash policy of a company given a change in its membership in the S&P 500 index. Our assumption is that index addition or deletion affects access and the cost of financing. We use a sample of 113 additions and 47 deletions to the index for the period 1981-2000. The impact on the cash policies of the companies in the study is asymmetric. Firms added to the S&P 500 index come in with high levels of cash and retain that level for at least two years.

Not surprisingly, firms deleted from the S&P 500 index leave with a low level of cash. However, they increase their cash holdings significantly in the year immediately after deletion. Further, we find that firms deleted from the index increase their cash holdings as a result of saving cash from current period cash flows. Our findings suggest that deletion from the S&P 500 constrains access and/or the cost of financing, and firms respond by increasing their cash holdings.

Introduction

We examine the effect of an external event on the cash policy of a firm. The external event is a change in the company's membership in the S&P 500 index. This incident leads to a significant stock market reaction. The cause for the volatility of the stock price is informed by studies based on information content hypothesis (Hasbrouck, 1991), downward sloping demand curve for stocks (Shleifer, 1986; Jain, 1987), increased liquidity (Hegde and McDermott, 2003), and price pressure hypothesis (Harris and Gurel, 1986). Our hypothesis is that S&P 500 index addition or deletion affects the cash policy of firms. Our theory is based on the assumption that index change is an important event that affects factors found to be relevant for cash policy, for example access and the cost of financing.

Our premise is that access and the cost of financing affects a firm's need to save and hold cash. Bates, Kahle, and Stulz (2008) document a trend of increasing cash balances in corporate balance sheets. The implication is that cash policy has emerged as an important financial policy, rather than as a residual decision. Studies find a significant role for cash policy in firm performance (Almeida, Campello, and Weisbach, 2004), takeover defense (Pinkowitz, 2000), and market share expansion (Fresard, 2009).

Opler, Pinkowitz, Stulz, and Williamson (1999) identify several firm level variables that explain the level of cash holding. Almeida, Campello, and Weisbach (2004) find a relationship between the financial constraint status of a firm and its cash saving behavior. Riddick and Whited (2009) find that income uncertainty and the cost of financing impact corporate propensity to save cash. Other studies have examined the impact of firm level variables on the value of cash holdings.

We use two cash policy variables: cash holdings and cash flow sensitivity of cash. Cash flow sensitivity of cash captures a firm's cash saving from current period cash flows. Our sample consists of 113 additions and 47 deletions of U.S. manufacturing firms for the period 1981--2000. We calculate changes in cash holdings for five years around the year of index change. The results were found to be asymmetric. Firms added to the index come with a high level of cash and retain that cash, at least for the first two years after addition. However, firms deleted from the index leave with smaller cash holdings, but will increase cash levels immediately after the deletion.

We also find that firms deleted from the index save a significant amount of current period cash flows after deletion, but firms added have no systematic relationship between cash changes and cash flows. This implies that firms deleted from the index move to higher target cash holdings immediately by saving from current period cash flows.

Cash policy is an important topic, and its importance is accentuated in uncertain times. Our study contributes to the current research by examining the effect of a unique and an exogenous change on this important policy. Our findings support the idea that cash policy is affected by a firm's external environment, including membership in the S&P 500 index. It is supportive of the idea that access and the cost of financing affects cash policy of firms. Finally, while most literature on index changes has focused on explaining the stock market reaction, we examine the effect of index change on an important financial policy.

Interpretations of our results can be considered constrained due to two factors. First, firmlevel variables affecting the S&P committee decision may be the same as variables affecting the ability to raise cash. Second, we do not have a set of control firms to ensure that we are capturing the pure effect of additions and deletions from the index. However, we believe that the sample distribution and study design do capture the effect of additions and deletions. The rest of this paper is organized as follows: a brief literature review; our hypothesis; a description of the data and methodology; a discussion of results, and the conclusion.

Literature Review

There are three strands in the review of the literature: studies on cash policy; studies on the effect of access and the cost of financing on cash policy of firms; and studies that examine the effect of an index change. We provide a brief review of all three strands in this section.

Cash policy: The increase of cash holdings of U.S. firms and the recent financial crises highlight the importance of cash policy in corporate finance. Bates, Kahle, and Stulz (2008) document the increase in the cash holdings of firms over the last several years. While holding some cash is necessary for transactional purposes, studies document other reasons such as tax planning, defensive actions, as well as agency theory (1).

Fresard (2009) suggests a strategic motive of holding cash by showing that cash holdings drive gains in market share. Pinkowitz (2000) finds that cash holdings act as a takeover defense and reduce the probability that a firm will be acquired. Other research shows that the value of cash holdings may be affected by the firm's access to capital markets (Faulkender and Wang, 2006), quality of governance (Dittmar and Mahrt-Smith, 2007), and investor protection provided by a country (Pinkowitz, Stulz, and Williamson, 2006).

Effect of access and the cost of financing on cash policy: Opler, Pinkowitz, Stulz, and Williamson (1999) find that firms have target cash holdings with risky firms and financially constrained firms holding more cash. Almedia, Campello, and Weisbach (2004) focus on a firm's propensity to save cash from cash flows or the cash flow sensitivity of cash. They find that financially constrained firms set aside more cash out of current period cash flows, and unconstrained firms have no systematic relationship between cash savings and current period cash flows. Therefore, if a firm can access capital markets relatively easily it doesn't need to save much cash for its investment needs. It also explains why unconstrained firms hold less cash than constrained firms.

Khurana, Martin, and Pereira (2006) examine the relationship in an international setting and find a connection between cash flow sensitivity of cash and the financial development of a country. Acharya, Almedia, and Campello (2007) study the cash policy in conjunction with the debt policy of firms. They find that financially constrained firms save more cash out of current period cash flows "to hedge future investment against income shortfalls" ((2)pp. 515).

In a recent study, Riddick and Whited (2009) examine the impact of income uncertainty and cost of external finance. They find that these two variables are more useful in explaining propensity to save cash rather than financial constraints.

S&P 500 additions and deletions: The S&P 500 index is designed to be a representative of the U.S. equity market. As the S&P puts it, companies in the index are considered leading companies in leading industries. Some of the determinants for adding a company to the index are market capitalization, market liquidity, and financial viability, among others. While some of the determinants are based on fundamentals (e.g., market capitalization) which tend to be objective, other determinants (e.g., financial viability) are mainly subjective.

On the other hand, delisting--that is, deletion from the S&P 500, arises due to events such as mergers and acquisitions, or if companies 'substantially violate one or more of the addition criteria' (3).

An addition to the S&P 500 has a significant positive market reaction and a deletion has a considerable negative market reaction. This important reaction has led to several studies on this event. Four explanations have been offered to explain the aforementioned market reaction: first, the change conveys new information to the market (Jain, 1987); secondly, price impact is the result of a downward-sloping demand curve for shares (Shleifer, 1986); thirdly, increased liquidity (Hedge and McDermott, 2003); and finally, price pressure created by increased demand from index funds (Harris and Gurel, 1986).

While Dennis, McConnell, Ovtchinnikov, and Yu (2003) find that firms added to the index "experience significant increases in EPS forecasts and significant improvements in realized earnings (pp.1821)," other studies discredit the information content hypothesis [Shleifer, (1986) and Harris and Gurel (1986)]. Chen, Noronha, and Singal (2004) find that the positive impact of index addition is permanent but the negative impact of index deletion is temporary.

Hypotheses

Our primary objective is to test the change in cash holdings after S&P 500 index additions and deletions. Our assumption is that an index change affects the firm's access and the subsequent cost of financing. Firms that have lesser access to markets and/or have higher cost of external financing, tend to hold more cash. Therefore, we predict a decrease in cash holdings as a result of an addition to, and an increase in cash holdings as a result of the deletion from, the S&P 500 index. Our first hypothesis is as follows:

[H.sub.0] (1): Firms added to the S&P 500 index reduce their cash holdings, and firms deleted from the S&P 500 index increase their cash holdings.

Acceptance of [H.sub.0] (1) implies that S&P 500 additions and deletions affect cash policy of firms.

Our second objective is to examine the change in the cash flows sensitivity of cash for index additions and deletions. Cash flow sensitivity of cash captures cash savings from current period cash flows, and thus reflects on the saving behavior of firms. Since firms that have lesser access to markets or have higher cost of external financing are expected to save more, we predict a positive cash flow sensitivity of cash for index deletions, and statistically insignificant changes for index additions. Thus, our second hypothesis is as follows:

[H.sub.0] (2): Cash flow sensitivity of cash for firms added to the S&P 500 index is indeterminate, but is positive for firms deleted from the S&P 500 index.

Acceptance of [H.sub.0] (2) supports our thesis that membership in the S&P 500 index affects the cash saving behavior of firms.

Data and Methodology

Data: We start with the list of firms added or deleted from S&P 500 used in Barberis, Shleifer, and Wurgler (2005) (4). We follow Almeida, Campello, and Weisbach in using only manufacturing firms. We use firms added or deleted during the period 1981-2000 that have the required variables for all five financial years (-2 year to +2 year) around the event, with 0 being the year of inclusion or deletion. We also delete firms which appear as an addition and deletion on the same date. Our final sample consists of 113 additions and 47 deletions.

We use the Compustat database to obtain financial information.

Table 1 reports descriptive statistics for our 113 inclusions and 47 deletions for five years around the index change. Panel A reports mean values and panel B reports median values. We report values for firms deleted from the index below values for firms added to the index. We use five variables: total assets (compustat # 6), market/book ratio [(compustat # 25 * compustat # 199)/compustat # 60], cash/ total assets ratio (compustat # 1/compustat # 6), total debt/total assets ratio [(compustat # 34 + compustat # 9)/compustat # 6], cash value (compustat # 1), cash flows/total assets ratio [(compustat # 13--compustat # 19--compustat # 21)/compustat # 6].

For the index change year, the mean asset size for firms added (deleted) is $2113.69 million ($3574.78 million), the mean market/book ratio is 5.51 (2.48), the mean total debt/total assets ratio is 0.15 (0.27), the mean cash/total assets ratio is 0.19 (0.10), cash value is $315.07 million ($288.69 million), and the mean cash flows/total assets is 0.19 (0.06).

For the index change year, the median asset size for firms added (deleted) is $1282.40 million ($1659 million), the median market/ book ratio is 3.71 (1.12), the median total debt/ total assets ratio is 0.14 (0.20), the median cash/ total assets ratio is 0.13 (0.06), the median cash value is $122.81 million ($65.89 million), and the median cash flows/total assets is 0.19 (0.09).

These figures imply that firms added to the index are smaller, have a higher market/book ratio, lower leverage, higher cash holdings, and higher cash flows than firms deleted from the index. However, on an absolute level these are large firms.

Methodology: Our primary objective is to examine changes in cash holdings subsequent to an addition or deletion from the S&P 500 index. Table 2, Univariate Analysis, reports differences in cash holdings over three time periods. The first difference is across four years: -2 year to +2 year. The second difference is across three years: -1 year to +2 year. Finally, the third difference is across two years: -1 year to +1 year. We report median values below mean values.

Table 3 reports a Multivariate Analysis of change in cash holdings over a five year period around the index change. We specify our model as follows using variables defined earlier in the paper:

[CashHoldings.sub.i,t] =a0 + a,Cash [flows.sub.i,t] + [a.sub.2][MB.sub.i,t] + [a.sub.3][Size.sub.i,t] + [a.sub.4][Dummy.sub.i,t] + [[epsilon] .sub.it] (1)

The Dummy variable is 'Addition Dummy' for index inclusions and 'Deletion Dummy' for index deletions and is equal to 1 for years after the index change year. Thus, the coefficient on the dummy variable captures the change in cash holdings after the index change.

Our secondary objective is to examine the cash savings behavior of firms subsequent to S&P 500 index addition or deletion. We follow Almedia, Campello, and Weisbach (2004) in calculating cash flow sensitivity of cash or cash savings from current period cash flows.

We specify our model as follows:

[DELTA] [CashHoldings.sub.i,t] = a0 + [a.sub.1] Cash [flows.sub.i,t] + [a.sub.2][MB.sub.i,t] + [a.sub.3][Size.sub.i,t] + [[epsilon].sub.i,t] (2)

where [DELTA] CashHoldings is change in cash holdings divided by total assets (compustat # 274/compustat # 6) and Size is the natural log of assets. CashFlow is cash flows/total assets and MB is the market/book ratio, both as defined earlier. Thus, [a.sub.1] captures the cash flow sensitivity of cash or cash savings from current period cash flows. We report results of cash flow sensitivity of cash analysis in Table 4.

We report values for five years around the index change year.

We also study the change in cash flow sensitivity of cash by pooling the sample and specifying the following model:

[DELTA] [CashHoldings.sub.i,t] = a0 + [a.sub.1]Cash [flows.sub.i,t] + [a.sub.2][MB.sub.it] + [a.sub.3][Size.sub.i,t] + [a.sub.4][Dummy.sub.i,t] + [a.sub.5][Dummy*Cash [flows.sub.i,t] + [[epsilon] .sub.i,t] (3)

where the Dummy variable is 'Addition Dummy' for index inclusions and 'Deletion Dummy' for index deletions and is equal to 1 for years after the index change year. Other variables are as defined earlier. Thus, [a.sub.5] captures the change in cash flow sensitivity of cash or cash savings from current period cash flows after addition or deletion. We report these results in Table 5. We report values for four years and five years around the index change year.

Discussion of Results

We present our results in five tables.

As detailed in the previous section:

--the first table provides descriptive statistics of variables used in analysis

--the second table reports results of timeseries change in cash holdings around the crisis

--the third table reports the results of multivariate analysis of cash holdings around the crisis

--the fourth table reports results of cash flow sensitivity of cash analysis

--the fifth table reports results of time series cross sectional analysis for change in cash holdings around the crisis.

Table 2, Univariate Analysis reports results for tests of the first hypothesis. We report mean and median values of differences in cash holdings over three different time periods.

For the four year period (-2 year to +2 year), the mean (median) increase in cash holdings is 0.16% (1.37 %) for index additions and 5.52% (2.56%) for index deletions. The mean and median change values for index additions are not statistically significant, but the mean and median change values for index deletions are statistically significant at the one percent level.

For the three year period (-1 year to +2 year), the mean (median) increase in cash holdings is -0.45% (0.44%) for index additions and 4.57% (1.57%) for index deletions. The mean and median change values for index additions are not statistically significant, but the mean and median change values for index deletions are statistically significant at the one percent level

For the two year period (-1 year to +1 year), the mean (median) increase in cash holdings is -0.08% (0.37) for index additions and 2.11% (0.14%) for index deletions. The mean and median change values for index additions are not statistically significant, the mean change value for index deletions is significant at the ten percent level, and median change values for index deletions is statistically insignificant.

These are asymmetric results and provide partial support for our first hypothesis. Firms added to the index come with a high level of cash and do not reduce their cash holdings, at least not in the first two years after index inclusion. Firms deleted from the index leave with a low level of cash, but increase their cash holdings significantly immediately after removal from the index.

Table 3 reports results of a multivariate analysis for test of the first hypothesis. In table 3, we provide results of equation (1) regression for five years (-2 year to +2 year) The coefficient on the 'Addition dummy' is statistically insignificant but the coefficient on the 'Deletion dummy' is positive and significant at the ten percent level, indicating an increase in cash holdings after index deletions.

Table 4 and Table 5 report results for tests of our second hypothesis. In table 4, we provide results of equation (2) regression for five years (-2 year to +2 year). Panel A reports regression results for index additions, and panel B reports regression results for index deletions. The coefficient of cash flows/total assets captures cash flow sensitivity of cash or cash savings from current period cash flows.

For index additions, coefficient of cash flows/ total assets ratio is not statistically significant for any of the five years. These additions to S&P 500 index are relatively big firms with high levels of cash. They do not save much from current period cash flows. Since we do not find any significant change in cash holdings for these firms, these results are not surprising.

For index deletions, coefficient of cash flows/ total assets ratio is positive and statistically significant at the one percent level for the year following the removal (year 1). This suggests that these firms save a significant part of cash flows in the year immediately following the deletions to increase their cash holdings.

In table 5, we provide results of equation (3) regression for a pooled sample for four years (-2 year to +1 year) and five years (-2 year to +2 year). Panel A reports regression results for index additions, and panel B reports regression results for index deletions. The interaction term between the dummy and cash flows/total assets captures change in cash flow sensitivity of cash, where the addition/deletion dummy is equal to 1 after addition or deletion to the index.

For index additions, the coefficient of the interaction term is not statistically significant for either the four years (-2 to +1 years) or five years (-2 to +2 years). For index deletions, the coefficient of the interaction term is positive and statistically significant at the one percent level for four years (-2 to +1 years). For the five year period, the coefficient is postive and statistically significant at the ten level. These results are consistent with earlier findings that deleted firms save a significant part of cash flows in the year immediately following the deletions to increase their cash holdings.

The findings related to cash flow sensitivity of cash are consistent with our second hypothesis: firms are more financially constrained once removed from the index, and respond by increasing their cash holdings.

To conclude, we find that firms added to the S&P 500 index do not change their cash holdings, but firms removed from the S&P 500 index increase their cash holdings in the year immediately following the change. The increase in cash holdings for firms removed from the index is done by saving cash from current period cash flows.

Conclusion

Addition or deletion from the S&P 500 index is considered to be a major event, and has been extensively studied. We examine the effect of this event on the cash policy of 113 firms that were added to and 47 firms that were removed from the index. Access and the cost of financing have impact on the cash policy of firms, and thus we predict that the event will have an impact on the cash policy of firms added to or deleted from the index.

We get asymmetric results:

--Firms added to the index do not reduce (or increase) their cash holdings, but firms deleted from the index add to their cash holdings.

--Firms deleted from the index increase their cash holdings by saving more cash from their current period cash flows.

Our findings are supportive of earlier studies on the effect of access and cost of financing on cash policy.

Frank Andrews, College of Management, University of Massachusetts Lowell, Lowell, MA

Frank_Andrews@uml.edu

Ravi Jain, College of Management, University of Massachusetts Lowell, Lowell, MA

Ravi_Jain@uml.edu

Rajeeb Poudei, College of Business, University of North Texas, Denton, TX

Rajeeb.poudel@unt.edu

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Endnotes

(1) Please refer to Bates, Kahle, and Stulz (2008) for a detailed discussion of all these motives.

(2) Please refer to Almedia, and Campello (2007), pg. 515 for a detailed discussion.

(3) Please refer to 'S&P U.S. Indices Index Methodology' for a detailed discussion, available at http://www.spindices.com/documents/ methodologies/methodology-sp-us-indices.pdf

(4) The data is available on Jeffrey Wurgler's website: http://pages.stern.nyu.edu/~jwurgler/
Table 1

Descriptive Statistics

This table reports descriptive statistics for variables used in
our analysis. A total of 113 additions and 47 deletions to the
S&P 500 index during 1981 to 2000 were included in the sample.
Only manufacturing firms are included. Market-Book ratio is
market value of equity (compustat # 199 * compustat # 25) divided
by the book value of equity (compustat # 60). Total debt is the
sum of short-term debt (compustat # 34) and long-term debt
(compustat # 9). Cash is cash and short-term investments
(compustat # 1). Cash flow is the operating income before
depreciation (compustat # 13) less dividends (preferred compustat
# 19 and common compustat # 21).

Panel A: Mean values: 113 additions and 47 deletions

Variables                   Years       -2        -1         0

Asset Size ($ million)    Additions   1310.13   1540.96   2113.69
                          Deletions   4685.49   3662.33   3574.78
Market/Book ratio         Additions    4.16      5.55      5.51
                          Deletions    2.05      1.80      2.48
Total debt/Total assets   Additions    0.16      0.16      0.15
                          Deletions    0.30      0.29      0.27
Cash/Total assets         Additions    0.18      0.19      0.19
                          Deletions    0.07      0.08      0.10
Cash ($ million)          Additions   141.66    191.79    315.07
                          Deletions   249.81    219.57    288.69
Cash flows/Total assets   Additions    0.19       0.2      0.19
                          Deletions    0.10      0.10      0.06

Variables                   Years       +1        +2

Asset Size ($ million)    Additions   2663.61   2720.99
                          Deletions   3727.55   3689.32
Market/Book ratio         Additions    5.02      4.23
                          Deletions    1.48      -1.12
Total debt/Total assets   Additions    0.14      0.14
                          Deletions    0.26      0.27
Cash/Total assets         Additions    0.19      0.18
                          Deletions    0.10      0.12
Cash ($ million)          Additions   399.63    449.64
                          Deletions   228.86    288.33
Cash flows/Total assets   Additions    0.18      0.17
                          Deletions    0.08      0.09

Panel B: Median values: 113 additions and 47 deletions

Variables                   Years       -2       -1         0

Asset Size ($ million)    Additions   838.86   941.24    1282.40
                          Deletions    1666    1726.14    1659
Market/Book ratio         Additions    3.41     3.71      3.71
                          Deletions    1.63     1.74      1.12
Total debt/Total assets   Additions    0.14     0.15      0.14
                          Deletions    0.27     0.26      0.20
Cash/Total assets         Additions    0.12     0.13      0.13
                          Deletions    0.03     0.04      0.06
Cash ($ million)          Additions    68.3     85.69    122.81
                          Deletions   54.34     51.72     65.89
Cash flows/Total assets   Additions    0.18     0.19      0.19
                          Deletions    0.10     0.10      0.09

Variables                   Years       +1        +2

Asset Size ($ million)    Additions   1675.35   1951.87
                          Deletions   1829.40   1626.90
Market/Book ratio         Additions    3.37      3.09
                          Deletions    1.08      1.35
Total debt/Total assets   Additions    0.14      0.12
                          Deletions    0.26      0.25
Cash/Total assets         Additions    0.13      0.13
                          Deletions    0.07      0.08
Cash ($ million)          Additions   172.19    191.21
                          Deletions   101.20     90.30
Cash flows/Total assets   Additions    0.18      0.16
                          Deletions    0.09      0.11

Table 2

Univariate Analysis

This table reports the change in cash-total assets ratio around a
year in which a firm is added to or deleted from the S&P 500
index. There are 113 additions and 47 deletions from 1981 to 2000
in the sample. All firms in the sample are manufacturing firms.
We calculate differences over three time-periods. The first
difference is across four years: -2 year to +2 year. The second
difference is across three years: -1 year to +2 year. Finally,
the third difference is across two years: -1 year to +1 year. The
significance levels for means are based on two-tailed t-test and
the significance levels for medians are determined using Wilcoxon
Signed-Ranks test. *, ** and *** denote significantly different
from zero at 10%, 5% and 1%.

Change in cash holdings

Time period                   Additions   Deletions

                      N          113         47

-2 year to +2 year    Mean      0.16      5.52 ***
                      Median    1.37      2.56 ***
-1 year to +2 year    Mean      -0.45     4 57 ***
                      Median    0.44      1.57 ***
-1 year to +1 year    Mean      -0.08      2.11 **
                      Median    0.37        0.14

Table 3

Multivariate Analysis

This table reports results for changes in cash holdings for five
years around a year in which a firm is added to or deleted from
the S&P 500 index as modeled in equation (1):

[CashHoldings.sub.i,t] = [alpha]0 + [[alpha].sub.1] [Cash
flows.sub.i,t] + [[alpha].sub.2] M[B.sub.i,t] +
[[alpha].sub.3] [Size.sub.it] + [[alpha].sub.4] [Dummy.sub.i,t] +
[[epsilon].sub.it]

There are 113 additions and 47 deletions from 1981 to 2000 in the
sample. All firms in the sample are manufacturing firms. The
dependent variable is 'cash-total assets ratio.' Cash is cash and
short-term investments (compustat # 1). The addition dummy and
deletion dummy indicate the dummy for addition and deletion
respectively. The coefficient on addition-deletion dummy captures
changes in cash holdings after the index change. Control
variables included are cash flow-total assets, log of total
zero at 10%, 5% and 1%. assets, and market-book ratio. Panel A
reports regression results for 113 additions and panel B reports
regression results for 47 deletions. P-values reported in the
parenthesis are based on robust standard errors. *, ** and ***
denote significantly different from

Change in cash holdings (-2 to +2 years)

Explanatory variables    Additions    Deletions

                          Dependent variable =
                           cash/total assets

N                           565          235
Cash flow/total assets     -0.086       -0.035
                          (0.337)      (0.625)
Log of total assets      -0.032 ***   -0.021 ***
                          (0.000)      (0.000)
Market/Book ratio        0.012 ***      0.000
                          (0.000)      (0.429)
Addition dummy             0.020          --
                          (0.180)
Deletion dummy               --        0.028 *
                                       (0.058)
Intercept                0.366 ***    0.234 ***
                          (0.000)      (0.000)
R-squared                  0.1375       0.086
F statistics               13.72         5.4
                          (0.000)      (0.000)

Table 4

Cash flow sensitivity of cash

This table reports the 'cash flow sensitivity of cash' for five
years around a year in which a firm is added to or deleted from
the S&P 500 index as modeled in equation (2):

[DELTA] [CashHoldings.sub.i,t] = [alpha]0 + [[alpha].sub.1] [Cash
flows.sub.i,t] + [[alpha].sub.2] M[B.sub.i,t] +
[[alpha].sub.3] [Size.sub.I,t] + [[epsilon].sub.i,t]

There are 113 additions and 47 deletions from 1981 to 2000 in the
sample. All firms in the sample are manufacturing firms. The
dependent variable is 'change in cash-total assets ratio-Change
in cash is increase or decrease in cash equivalents (compustat #
274). The coefficient on cash flows-total assets captures savings
from current period cash flows or the cash flow sensitivity of
cash. Control variables included are log of total assets and
market-book ratio. Panel A reports regression results for 113
additions and panel B reports regression results for 47
deletions. P-values reported in the parenthesis are based on
robust standard errors. *, ** and *** denote significantly
different from zero at 10%, 5% and 1%.

Panel A: Cash flow sensitivity of cash--Additions

Explanatory              -2        -1         0        +1       +2
variables
                        Dependent variable = change in cash/total
                                        assets

N                       113        113       113       113      113

Cash flow/total        0.040      0.089    -0.155     0.092   -0.049
  assets              (0.701)    (0.418)   (0.201)   (0.160)  (0.440)
Log of total assets    -0.006    -0.005    -0.008     0.008    0.000
                      (0.609)    (0.588)   (0.470)   (0.316)  (0.944)
Market/Book ratio     0.004 **    0.001    0.003 *    0.001    0.001
                      (0.048)    (0.146)   (0.056)   (0.154)  (0.308)
Intercept              0.030      0.039     0.098    -0.075    0.010
                      (0.755)    (0.657)   (0.321)   (0.289)  (0.841)
R-squared              0.036      0.048     0.051     0.030    0.011
F statistics            2.16      2.83      1.41      2.11     0.38
                      (0.097)    (0.042)   (0.243)   (0.104)  (0.77)

Panel B: Cash flow sensitivity of cash--Deletions

Explanatory           -2        -1         0          +1        +2
variables
                         Dependent variable = change in cash/total
                                        assets

N                     47        47        47          47        47

Cash flow/total      0.141     0.129     0.061    0.430 ***    0.048
  assets            (0.344)   (0.271)   (0.106)    (0.000)    (0.578)
Log of total         0.000    -0.003    -0.003    -0.012 ***   0.002
  assets            (0.992)   (0.429)   (0.763)    (0.006)    (0.697)
Market/Book ratio    0.003     0.001     0.000      -0.002     0.000
                    (0.112)   (0.805)   (0.534)    (0.236)    (0.804)
Intercept           -0.021    0.015)     0.035     0.062 *    -0.010
                    (0.398)   (0.660)   (0.639)    (0.065)    (0.788)
R-squared            0.055     0.051     0.035      0.526      0.014
F statistics         1.53      0.71      1.63        7.35      0.55
                    (0.221)   (0.554)   (0.197)    (0.000)    (0.648)

Table 5

Cash flow sensitivity of cash

This table reports the 'cash flow sensitivity of cash' for four
years (column #1) and five years (column #2) around a year in
which a firm is added to or deleted from the S&P 500 index as
modeled in equation (3):

[DELTA] [CashHoldings.sub.i,t] = [alpha]0 + [[alpha].sub.1] [Cash
flows.sub.i,t] + [[alpha].sub.2] M[B.sub.i,t] +
[[alpha].sub.3] [Size.sub.i,t] + [[alpha].sub.4] [Dummy.sub.it] +
[[alpha].sub.5] Dummy*[Cash flows.sub.i,t] [[epsilon].sub.I,t]

There are 113 additions and 47 deletions from 1981 to 2000 in the
sample. All firms in the sample are manufacturing firms. The
dependent variable is 'change in cash-total assets ratio.' Change
in cash is increase or decrease in cash equivalents (compustat #
274). The coefficient on cash flows-total assets captures savings
from current period cash flows or the cash flow sensitivity of
cash. Control variables included are log of total assets and
market-book ratio. Panel A reports regression results for 113
additions; and panel B reports regression results for 47
deletions. P-values reported in the parenthesis are based on
robust standard errors. *, ** and *** denote significantly
different from zero at 10%, 5% and 1%.

Panel A: Additions

Explanatory variables    -2 to +1 years   -2 to +2 years

                              Dependent variable =
                          change in cash/total assets

N                             452              565
Cash flow/total assets       0.021            0.024
                            (0.723)          (0.684)
Log of total assets          -0.002           -0.002
                            (0.718)          (0.695)
Market/Book ratio          0.002 ***        0.002 ***
                            (0.000)          (0.000)
Addition dummy               -0.015           -0.003
                            (0.360)          (0.838)
Addition * cash flow/        0.029            -0.038
  total assets              (0.702)          (0.557)
Intercept                    0.020            0.019
                            (0.655)          (0.619)
R-squared                    0.030            0.027
F statistics                  4.53             4.23
                            (0.001)          (0.000)

Panel B: Deletions

Explanatory variables    -2 to +1 years   -2 to +2 years

                             Dependent variable =
                          change in cash/total assets

N                             188              235
Cash flow/total assets       0.067           0.065 *
                            (0.104)          (0.100)
Log of total assets          -0.004           -0.004
                            (0.139)          (0.170)
Market/Book ratio            0.000            0.000
                            (0.563)          (0.646)
Deletion dummy             -0.033 ***         -0.018
                            (0.008)          (0.122)
Deletion * cash flow/      0.351 ***         0.196 *
  total assets              (0.001)          (0.054)
Intercept                    0.035            0.029
                            (0.129)          (0.170)
R-squared                    0.171            0.105
F statistics                  4.48             2.1
                            (0.001)          (0.066)
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Article Details
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Author:Andrews, Frank; Jain, Ravi; Poudei, Rajeeb
Publication:Review of Business
Article Type:Statistical table
Geographic Code:1USA
Date:Jun 22, 2015
Words:6354
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