Determinants of Financial Conservatism: Evidence from Low-Leverage and Cash-Rich UK Firms

Alfonsina Iona (), Leone Leonida and Aydin Ozkan

Discussion Papers from Department of Economics, University of York

Abstract: This paper investigates the characteristics of firms that adopt persistent policies of low leverage and substantial cash reserves. In doing so, specific attention is paid to the role of internal corporate governance mechanisms in influencing firms' conservative financial policies. The analysis of this paper classifies firms as financially conservative if they adopt both low-leverage and high-cash policies at the same time. Using a large sample of non-financial UK firms over the period 1984-2001, we provide evidence that conservative firms tend to undershoot (overshoot) their target leverage (cash holdings) levels. Our results also suggest that managerial ownership, board composition and, to some extent, ownership concentration are important determinants of the probability of firms adopting conservative financial policies.

Keywords: Financial conservatism; leverage; cash holdings; ownership structure (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-eec
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