Academic journal article Business: Theory and Practice

Under the Cash Pooling: Does the Cooperation Matter?

Academic journal article Business: Theory and Practice

Under the Cash Pooling: Does the Cooperation Matter?

Article excerpt

Introduction

One of the most important financial decisions the firm makes is how much cash to hold to guarantee the survival into the economy in the future. Firms hold a significant portion of their assets in the form of cash; but the management of the cash establish the efficiency development of the company that influence and it's influenced by the external economy determinants. In this line, the grey literature shows that big banks and big companies are using the cash as reserves instead of invest it to growth the economy. One of the main reasons is that the economy situation will not be change to a better situation; the conservative view; or at least it will be very difficult to guarantee the liquidity of the invested cash, that mean into economic theory that "the corporate bigwigs just don't see the opportunities for profit". The data shows the situation; for example the latest report from the Federal Reserve of USA shows that big banks' cash reserves are just under $1.6 trillion--an astonishing 80 times the $20 billion they held in reserve in 2007. In the other side, large non-financial institutions' reserves are more than $1.7 trillion. All that parked money translates directly to lost growth and missing jobs. A recent study of Political Economy Research Institute at the University of Massachusetts Amherst found that if America's largest banks and non-financial companies moved just some of that cash into productive investments instead, that would give the economy a huge boost, creating about 19 million jobs in the next three years and lowering the unemployment rate to fewer than 5 percent. Scientific literature has studied this aspect as well. The most important article written by Opler et al. in 1999 establishes that corporate cash holdings of the S&P 500 companies alone amount to $716 billion in 1994; and a more recent article written by Dittmar and Marth-Smith (2007) state that the sum of all cash and marketable securities represented more than 13% of the sum of all assets for large publicly traded US firms. In this line Martinez-Sola et al. (2013) established that show empirically that the optimal level is around 14% for a sample of listed US industrial. Using the Amadeus database it is shown that the active companies, more than 470.000, during 2013 hold 18 billion [euro] in cash in 2011; nearly half of the shareholder funds amount.

But a company could maximize the value of cash holding if it takes into consideration the interests of all stakeholders using and sharing it into a control and getting benefit for the sharing action in opposite of a selfish action that reduce the whole stakeholders' efficiency. This option is possible under the criterion of efficiency in which the result will be effective when those who benefit from a change can compensate those who suffer the consequences (best result according to Pareto). The lack of studies regarding these aspects in business (cash holding and financial relations, stakeholder theory, value and efficiency criteria) makes necessary to develop a causal model that optimizes the value created by the financial relationships between stakeholders in the company into cash management relationship. The main issue and purpose is to delete the cash breaks between stakeholders of the companies that adversely affect the financial costs and increased financial distress.

In this regards, the aim of the paper is to develop a share cash administration model in which the companies of a corporation could split the cash with the proposal of get value; as consequence there is a positive repercussion into the economy. It is used a case study to show the possibility to establish this cash model: cash pooling. The company is called Mondragon Cooperative Corporation (MCC). It is relevant and significant because it is the seventh largest Spanish company in terms of asset turnover and the leading business group in the Basque Country. Moreover it provides employment for more than 80,000 people working in 256 companies. …

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