Firms cash management, adjustment cost and its impact on ﬁrms’ speed of adjustment: a cross country analysis

Abstract

We investigate the ﬁrms’ speciﬁc attributes that determine the diﬀerence in speed of adjust-

ment (SOA) towards the cash holdings target in the Scandinavian countries: Denmark,

Norway and Sweden. We examine whether Scandinavian ﬁrms maintain an optimal level

of cash holdings and determine if the active cash holdings management is associated with

the ﬁrms’ higher SOA and lower adjustment costs. Our ﬁndings substantiate that a higher

level of oﬀ-target cost induces professional managers to rebalance their cash level towards

the optimal balance of cash holdings. Our results reveal that Scandinavian ﬁrms accelerate

SOA towards cash targets primarily for the precautionary motive. Moreover, our results

show that SOA is heterogeneous across Scandinavian ﬁrms based on adjustment cost and

deviate cash holdings towards the target mainly with the support of internal ﬁnancing. Fur-

thermore, our empirical ﬁndings show that the SOA of Norwegian ﬁrms is signiﬁcantly

higher than the Danish and Swedish ﬁrms.

Keywords Cash holdings· Speed of adjustment· Trade-oﬀ theory· Scandinavian

countries· GMM

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