Cash holding trends in Japanese firms and precautionary motive

This paper examines the trend in cash holdings ratios starting from the time firms have been mandatorily required to release consolidated financial statements and finds that the ratio is increasing every year. We also investigate whether this increasing trend varies by firm size and show that the tendency to hold cash strengthens as firm size becomes smaller. Moreover, when considering the determinants of firms' cash holding, precautionary motive is seen as the prime reason. In particular, firms with high growth, those operating in high business uncertainty, and those reducing dividends payouts attempt to hold a certain amount of cash to be prepared for future events and reduce the risk of insufficient funds. However, it is clear that the strength of this motivation to increase cash holdings varies with the firm size.