Cash-holding Benefits and Their Influence on Seasoned Equity Offering Decisions

Abstract

This study investigates the cash-holding motivations of issuers with excess cash. It aims to explain why these issuers choose to accumulate even more cash through stock issuances rather than utilize their existing surplus. I assess three competing cash-holding motivation hypotheses: whether issuers raise cash: (i) to fund the needs of future growth opportunities; (ii) for precautionary reasons; or (iii) to misuse it to maximize managerial benefits. I identify 480 issuers with pro-forma excess cash surpassing the seasoned equity offering size by considering a dataset of 3,438 issuers from 1996 to 2018. Results reveal that these issuers have stronger funding needs, and precautionary and agency-driven spending motivations, with precautionary reasons being the most dominant motivation. The results suggest that the benefits of cash-holding could motivate stock issuances.