Determinants of cash holdings—evidence from New Zealand local councils

ABSTRACT

The authors examine the likely determinants of cash holdings by New Zealand local councils. Extant finance literature suggests that organizations have transactional, precautionary and speculative motives for holding cash but empirical research on the determinants of cash holdings by local councils is still in its infancy. To examine the determinants of cash holding, the authors analysed data on a sample of 77 New Zealand local councils over the period 2000 to 2017. Managers were found to hold cash for operational and precautionary reasons. The results also suggest that local councils with better growth opportunities have greater cash holdings. Local councils with larger financing deficits, more significant capital expenditure, and higher management compensation have less cash. Overall, the findings imply that funds were being used effectively.

IMPACT

Unlike profit-motivated firms, not-for-profit (NFP) entities have no residual claimants with strong monitoring incentives. Also, the amount of cash endowment held by NFP entities is, on average, significantly larger than the cash holdings of for-profit firms of comparable size. This paper checks whether local councils use their funds in the best interest of citizens. The findings of this study will promote understanding of whether New Zealand local government entities operate effectively through appropriate corporate governance; such findings are essential for all stakeholders such as policy-makers, ratepayers, and any other citizens who might be affected by local council operations. This paper will help stakeholders in other jurisdictions to understand the determinants of cash reserves by their local government authorities.

KEYWORDS:

• Cash holding
• local councils
• New Zealand
• not-for-profit entities

Acknowledgement

An earlier version of this manuscript was presented to the 13^th New Zealand Management Accounting Conference 2019, and the authors sincerely appreciate the comments and feedback from the conference reviewer and participants. The authors are thankful to Public Money & Management’s Deputy Editor, Andreas Bergmann, and two anonymous reviewers for their constructive comments and suggestions to improve this paper.