Does Corporate Cash Holding Level Explain Mutual Fund Flow? Global Evidence

Abstract

This study investigates the influence of corporate cash holdings on the flow of open-end equity mutual funds. Building on the economic mechanisms that drive investors’ decisions when they construct their portfolio, the study analyses a comprehensive global dataset that includes 13,674 firms and 58,406 funds from 23 countries for the period from 2008 to 2017. Multiple regression models (pooled and fixed effect) are implemented to explore this relationship. The results show that there is a negative relationship between mutual fund flow and corporate cash holdings which indicates the significant role corporate cash holding policies have on the mutual fund industry. This article contributes to the literature by adding a new factor that can explain mutual fund investors’ behaviour. To the best of our knowledge, it is the first study to examine the relationship between corporate cash holdings and mutual fund flow, and one of the few studies to examine the influence of corporate-level decisions on the mutual fund industry. The results could help fund managers to better forecast future fund flow by considering corporate-level policies, namely cash holdings.

Keywords

Cash Holdings Fund Flow Mutual Funds Corporate Finance

Introduction

The accelerated development and increase in the total assets under management in the mutual fund industry have attracted the interest of academic scholars. Recent information reveals that the total value of the global mutual fund sector reached 109 trillion dollars in 2021, which means an increase of more than 50% over the previous decade according to Statista. It is very important to understand the main drivers of mutual fund flow to enhance investors’ decisions in their investment strategies and fund managers’ ability to forecast future money flow in/out of their funds. The motives driving equity fund flow have been studied widely in the finance literature. For example, factors affecting flow include fund performance (Barber et al., 2016; Wang et al., 2018), fund size (Elton et al., 2012; Ramos, 2009), volatility (Alsubaiei et al., 2020; Wang et al., 2018), credit default swap (CDS) (Alsubaiei et al., 2021), fees (Mansor et al., 2015; Vidal et al., 2015) and fund family (Alsubaiei, 2022; Bani Atta & Marzuki, 2019).

We expand the literature by examining a new factor that may have a significant influence on mutual fund flow. This article introduces corporate cash holdings in public firms as a key factor that can affect investors’ allocation decisions given the vigorous growth in cash levels over time and across both developed and emerging countries (Alomran & Alsubaiei, 2022). The increasing level of corporate cash holdings has attracted considerable attention in the last decade due to its importance for firms’ performance and strategies (Bates et al., 2018; Deb et al., 2017; Kim & Bettis, 2014).

The significance of studying the relationship between equity fund flow and the level of corporate cash is novel and is supported in a number of ways: (a) the mutual fund industry has witnessed major growth in recent decades which illustrates the importance of such an industry; (b) we contribute to the literature by providing in-depth analysis using a large international sample covering 23 countries around the world; (c) this is the first work, to the best of our knowledge, that questions the relationship between fund flow and corporate cash holdings; and (d) while most of the prior studies focus on the effect of corporate cash holdings on firm-level variables, such as performance (Deb et al., 2017) and excess return (Dittmar & Mahrt-Smith, 2007), this study examines whether corporate cash holding decisions influence investors’ allocation decisions (mutual fund flow). As a result, exploring the influence of corporate cash holdings level on mutual fund flow is of importance for academics, investors and fund managers to better understand the role of publicly listed firms’ decisions.

This article answers a main question regarding the sensitivity of money in equity mutual funds. First, does the level of cash reserved by listed firms in a country impact future mutual fund flow? This question is anticipated to provide an interesting contribution to the existing literature, as it sheds light on a new factor that describes mutual fund flow. Therefore, fund managers, particularly multinational ones, would be more informed about whether the proposed relationship is similar around the world. We employed several pooled regressions to study the effect of cash holdings on fund flow using all equity mutual funds (active and dead funds) that operated from 2008 until 2017 in 23 countries around the world.

This study demonstrates several interesting results. We find evidence for a negative relationship between mutual fund flow and cash holdings. The result suggests that equity fund flow is influenced by the cash holding decisions taken by firms. This outcome is in line with our prediction, which indicates that investors monitor the corporate cash level of listed firms and use this information to determine their future portfolio allocations. Our findings have important implications for investors around the globe as we provide evidence from a wide range of markets. Our results also help mutual fund managers to better understand the elements that motivate mutual fund flow by adding a new factor for consideration, corporate cash holdings. Finally, the results are expected to enhance policymakers’ understanding of the link between firms’ decisions regarding cash holding levels and equity mutual fund money flow.

The remainder of the article is organized as follows. Related literature and hypothesis development are discussed in the second section. The model specifications and the measurement of variables are described in the third section. The fourth section discusses the data description and descriptive statistics. The fifth section presents the main results of our analysis. The sixth section reports the robustness tests and conclusions are provided in the seventh section.

LiteratureReview and Hypothesis Development

Fund Flow

The determinants of mutual fund flow have received a massive amount of attention in the finance literature in recent decades (Alsubaiei et al., 2020; Li et al., 2018; Wang et al., 2018). Investigating the main drivers of fund money sensitivity has become a fundamental issue for financial markets stakeholders, due to the need to enhance fund managers’ investment strategies. An early work by Carhart (1997) examines the factors that drive mutual fund performance. There is a large amount of evidence in the literature that explores the relationship between the equity fund flow and mutual fund performance.

Filis et al. (2011) find that a fund’s past return is a key driver of future equity mutual fund flow as it shows that investors consider the fund’s performance when they allocate their cash among funds. Otten and Bams (2002) find a positive effect of the prior risk-adjusted return of funds on current fund money flow in their examination of five European countries. Ferreira et al. (2012b) examine the connection between flow and performance of mutual funds for a worldwide sample. They find that investors in developed markets treat past performance differently because of the level of sophistication of the market participants.

Prior studies document important evidence of the role of risk condition on the mutual fund flow. Ederington and Golubeva (2011) examine the effect of equity market risk measured by the volatility of investors’ behaviour when they construct their portfolio allocation. Their findings are in line with the trade-off mechanism which indicates the negative impact of market volatility on net cash flow. Moreover, Alsubaiei et al. (2020) address a new aspect that impacts the mutual fund flow by highlighting the key role played by the uncertainty of the market. They investigate the effect of oil volatility on equity money flow. Their results demonstrate that when the level of oil volatility increases, the fund flow decreases in the next period which confirms the concept of a risk–flow relationship.

Another strand in the finance literature explores whether CDS spread can be measured as a risk factor that affects mutual fund flow, using a worldwide sample (24 developed and developing markets) (Alsubaiei et al., 2021). The outcomes suggest that CDS spread is negatively associated with mutual fund flow which means that investors acknowledge CDS spread as a measure of risk. The existing evidence, supported by the finance literature, suggests that investors are motivated by risk factors such as equity market volatility, oil volatility and CDS spread.

Cash Holdings

If we had perfect capital markets, in which it was possible to raise funds at zero cost and carry liquid assets without opportunity cost, firms would not need to rely on cash reserves. However, as our world does not enjoy this theoretical market, firms must consider the costs and advantages of holding cash reserves.

From an economics perspective, Keynes (1936) was the first to introduce three motives that drive firms to hold liquid assets. Of these, the transaction and precautionary motives became the central interest and focus in finance literature, and the speculative motive has attracted the least interest, as it could be considered part of the former motives. In the middle of the twentieth century, the transaction motive was studied extensively (e.g., Baumol, 1952; Miller & Orr, 1966). Minimizing the firm’s need to convert non-liquid assets into cash to pay the firm’s liabilities and the transaction cost of this conversion is the comprehensive sense behind the transaction motive. The transaction cost motive is now deemed less important due to: (a) the economies of scale in large size firms (Mulligan, 1997), (b) the improvements in derivatives markets and (c) the inexpensive cost of converting non-cash assets into cash (Chen & Shane, 2014). Furthermore, the precautionary motive continues to be an underlying argument used in many papers in the existing literature (e.g., Almeida et al., 2004; Han & Qiu, 2007; Opler et al., 1999).

In the 1980s, Jensen (1986) proposed agency conflict between owners and managers as a new motive that influences cash holding decisions, beside the classical motives proposed by Keynes (1936) that are related to a firm’s translational and investment needs. The agency motive has attracted considerable attention in recent corporate cash holding literature. According to this motive, self-interested managers would tend to increase the cash holdings level beyond a firm’s translational needs to have more flexibility over a firm’s assets (i.e., the spending hypothesis suggested by Jensen and Meckling (1976)) bearing the opportunity costs of not using cash in value-creation investments. A large body of literature provides supporting evidence for the agency motive by documenting how firms with a higher agency problem (i.e., poorly governed firms) hold more cash (Horford et al., 2008), though the value of cash is lower in these firms in comparison with other firms (Deb et al., 2017; Dittmar & Mahrt-Smith, 2007).

During the last two decades, scholars have introduced and provided evidence of new motives for firms to increase their cash holdings. For instance, Foley et al. (2007) introduce a ‘tax-based’ motive for holding cash. They find that affiliates of US publicly traded firms increase cash holdings when repatriation tax is higher than applied local tax. Recently, management scholars argued that firms hold cash for strategic purposes based on the contexts in which the firms operate (Deb et al., 2017). A recent article introduces stock repurchase as an important motive for firms to increase their cash holdings (Wang & Nyborg, 2020).

Building on the aforementioned motives, we can divide prior studies on cash holding into three broad strands. First and foremost, there are academic papers that examine the determinants of corporate cash holdings, exploring the causes that lead to increase and decrease a firm’s cash reserves (Bates et al., 2009; Cardella et al., 2021; Ferreira & Viela, 2004; Ozkan & Ozkan, 2004). Another strand starts with and builds on the work of Faulkender and Wang (2006) and Pinkowitz et al. (2006) by focusing on the elements that impact the value of cash holdings (Bates et al., 2018; Dittmar & Mahrt-Smith, 2007; Frésard & Salva, 2010). The final strand, which receives less attention from scholars, concentrates on the speed of adjustment of cash towards the optimal cash level (Gao et al., 2013; Orlova & Rao, 2018). Most of the studies in each of the strands build their underlying arguments using trade-off theory, pecking order theory or agency theory (for a recent review, see Weidemann, 2018).

Hypothesis Development

This section describes our main hypothesis based on relevant theories supported in the literature. The finance literature has provided a considerable volume of studies that investigate the drivers of mutual fund flow (Alsubaiei, 2022; Alsubaiei et al., 2021; Li et al., 2018; Wang et al., 2018). Most of these articles concentrate on fund-based factors or characteristics such as performance, size and fees. In contrast, this work intends to add another driver that influences fund money flow from another sector, which is the level of cash holdings by publicly listed firms. Therefore, the expected results of this article will fill a gap in the literature regarding the relationship between cash holding and fund flow which can be explained from a few perspectives.

First, though there are a variety of motives for firms to hold cash, firms bear many sources of costs as they hoard more cash. The two main costs associated with holding cash are the cost of carry/opportunity cost (generating a lower rate of return than what a firm pays for debt) and the value-appropriation spending of cash by entrenched managers (Dittmar et al., 2003; Jensen and Meckling, 1976). Large cash reserves mean a higher opportunity cost (i.e., cost of carry) (Azar et al., 2016; Eskandari & Zamanian, 2022) and higher potential concerns regarding inappropriate spending (Harford, 1999) which lead to a lower rate of return on firms’ assets. Thus, decreasing the return of firms’ assets by hoarding more cash reserves discourages investors from increasing their investments in the equity market or at least encourages them to wait until they observe improvements in the performance of firms in the market.

Second, large cash reserves might signal to investors in the stock market that there is a scarcity of investment opportunities available for publicly listed firms, which leads individual investors to interpret such a move as a negative forecast of the local economy. Koo and Maeng (2019) show that firms increase their cash holdings when they do not have value-creating investment opportunities. Such a signal would encourage investors to seek different investment opportunities (i.e., less risky) than the equity markets, such as the bonds and money markets.

Third, another potential link between corporate cash holding and equity mutual fund flow is that as firms increase their cash holdings, less cash will be available at the disposal of retail shareholders. La Port et al. (2000) show that dividends paid to shareholders decreases as the level of corporate cash holdings increases. Recent literature documents that dividends paid by publicly listed firms and stock market liquidity are negatively associated (Vo, 2022). Thus, when firms increase cash holdings, less liquidity will be available in the market which might eventually lead to a decrease in money cash inflow into equity funds.

Moreover, corporations are large investors in the equity market through mutual funds (Evans & Fahlenbrach, 2012; Keswani & Stolin, 2008). As the corporations increase their cash holdings, they invest less in mutual funds. As a result, we anticipate the level of money inflow into the equity mutual fund market decreases when publicly listed firms increase their cash reserves. Thus, based on the aforementioned perspectives, we hypothesize:

H: Mutual fund flows and corporate cash holdings are negatively associated.

Model Specifications and Variables Measures

Model Specification

This study investigates the link between firms’ cash holdings and equity fund money flow. We employ Pooled Ordinary Least Squares (Pooled OLS) regressions. We report our results using pooled regressions because our main variables are market cash holdings, and market fund flow varies over time and the lagged fund flow (independent variable) tends to be an important control but causes bias to panel estimators such as random effects. Therefore, we employ pooled regressions following Shinozawa and Vivian (2015) and Wang et al. (2018) who conduct similar studies as outlined in the literature review. To study such a relationship, we estimate the following model:

{Flow}_{i, t} % = \frac{T N A_{i t} - T N A_{i t - 1} (1 + R_{i t})}{T N A_{i t - 1}}

where Fund flow_c,t represents the average of the net flow into all mutual funds in country c at year t, corporate cash_c,t–1 is the main explanatory variable which represents the average of cash holdings of all listed firms in country c at year t_–1, Fund return_c,t–1 is the lagged value of the average fund performance of all mutual funds in country c at year t-1, VIX_c,t_–1 is the volatility of the stock market in country c at year t_–1 and E_i,t is an error term.

To enhance the accuracy of the findings of our proposed question, we include a set of control variables that have been shown to influence the mutual fund flow and cash holdings. First, the mutual fund literature has provided important work on the impact of fund performance (the persistence effect), fund size (economy of scale effect), market return (stock market effect) and oil market volatility (macro-level risk effect) on mutual fund flow (see for example: Alsubaiei et al., 2020; Bodson et al., 2011; Ferreira et al., 2012a, b; Wang et al., 2018). Second, we try to eliminate the side effects on our results from the variables that influence the firms’ cash holdings, based on the findings of key literature (see, e.g., Alomran & Alsubaiei, 2022; Bates et al., 2009; Karpuz et al., 2020; Opler et al., 1999; Ozkan & Ozkan, 2004). Therefore, leverage (external funding/financial distress), market to book (investment opportunities), net working capital (firm liquidity), R&D (R&D intensity/competition), capital expenditure and acquisition (future growth) are included in our regressions. Detailed definitions of variables are presented in Table A1.

Variables Measures

Our dependent variable is a country’s average fund flow into all mutual funds domiciled in the focal country. Following the mutual funds literature (e.g., Alsubaiei et al., 2022; Frazzini & Lamont, 2008; Shinozawa & Vivian, 2015), our money flow indicates the net money flow over 1 year (the change of a fund’s size over a year). The numeric formula of fund flow is as follows:

\begin{array}{l} Fund {flow}_{c, t} = α + β_{1} Corporate {cash}_{c, t - 1} + \\ β_{2} Fund {flow}_{c, t - 1} + β_{3} Fund {return}_{c, t - 1} + \\ β_{4} V I X_{t - 1} + ε_{c, t}, \end{array}

where flow_it% is the percentage of the monthly changes of TNA; TNA is the fund total asset as obtained from the Lipper database R represents the fund performance taking into account the capital gain and dividends.

Our main explanatory variable is a country’s average corporate cash holdings of all listed firms domiciled in the focal country. Following cash holdings literature (e.g., Alomran & Alsubaiei, 2022; Bates et al., 2009; Ozkan & Ozkan, 2004), we implement the ratio of cash and cash equivalents to total assets. For each country and year, we compute the average of the cash ratios of all publicly listed firms. In addition to lagged fund flow, performance and stock market volatility are included as control variables in our models. For fund performance, we use the natural log of a fund’s return over 1 year (Jensen, 1986), then the average of all funds’ performance has been computed at country–year level. The risk-adjusted return is used following Ferreira et al. (2012a). VIX is employed as a proxy for the volatility of the stock market. VIX is the log of the change in the stock market volatility index.

Sample Description and Descriptive Statistics

Our sample covers all global publicly listed firms in the DataStream database and all equity funds for 23 developed and developing markets with the aim to provide a representative sample of the world market based on the available data (Alsubaiei et al., 2021). Our study covers the period from 2008 to 2017 and includes all dead/delisted and active firms and funds during this period to eliminate survivorship bias. Our data are collected from several sources. First, we collect firms’ financial-level variables from DataStream. Second, fund-level data are obtained from the Lipper for Investment Management database. Third, country-level data are collected from the World Bank website. The main sample covers 13,674 firms and 58,188 funds from 23 markets.

Table 1 presents the average corporate cash holdings, mutual fund flow, number of funds and number of listed firms by country. The US market has the largest number of funds in our sample whereas Columbia has the lowest number with 48 funds. There is a considerable difference among countries in terms of firms’ cash holdings average, ranging from 9% in Chile to 23% in Australia. It is worth noting that there are only two markets that have experienced a negative average money flow during our period of study, which are Russia and Japan.

Table 1.

Summary Statistics by Country.

N	Country	Number of Funds	Number of Firms	Cash Holding (%)	Flow (%)
1	Argentina	187	34	9.47	0.70
2	Australia	4,245	1,330	22.93	0.49
3	Brazil	3,820	85	17.13	0.05
4	Chile	918	70	8.62	2.89
5	Colombia	48	25	7.46	2.95
6	Denmark	343	95	15.50	0.22
7	Hungary	228	19	9.54	0.82
8	Indonesia	336	255	12.19	1.33
9	Japan	3,504	2,918	22.18	–0.05
10	Korea	3,803	1,640	16.62	4.53
11	Malaysia	670	641	15.72	0.59
12	Mexico	904	69	9.95	1.08
13	New Zealand	315	80	12.41	0.04
14	Norway	343	103	20.67	0.64
15	Poland	253	323	10.38	1.65
16	Russia	301	136	10.62	–0.63
17	Philippines	87	93	14.93	1.64
18	South Africa	797	212	12.70	0.96
19	Sweden	643	396	15.29	0.85
20	Thailand	927	381	12.44	0.42
21	Turkey	116	213	10.07	1.97
22	UK	17,358	1,093	16.67	0.58
23	USA	18,042	3,941	22.54	1.35

Note: This table presents statistics about our sample and main dependent and independent variables by country. Number of Funds is the number of funds operated in each country for the study period. Number of Firms is the number of firms operated in each country for the study period. Cash holding is defined as cash and cash equivalents divided by total assets. Flow is the net flow into equity mutual fund over 1 year.

Table 2 shows the summary statistics of the variables used in our study. On average, firms hold approximately 14% of their total assets in cash, with a minimum of 6% and a maximum of 28%. Moreover, the mutual fund flow, during the sample period, experiences money inflow with a mean of 0.4% with a standard deviation of 1.12%. Importantly, both performance measures (raw and risk-adjusted returns) exhibit negative returns during the investigation period. The oil market volatility shows a mean of 9% with a standard deviation of 3%. Using the natural logarithm of total assets, the average firm size is 12.2 and firms generate cash inflow of about 4% yearly. Furthermore, firms hold 21% debt, and invest 3% of their revenues in R&D, 5% of their assets in capital expenditure and 1% in acquisitions.

Table 2.

Summary Statistics of the Main Variables.

Variable	N	Mean	SD	Min	Max
Flow	207	0.427	1.122	–3.659	8.144
Cash	207	0.142	0.047	0.060	0.278
Raw return	207	–0.002	0.026	–0.100	0.070
Risk-adjusted return	207	–0.005	0.009	–0.048	0.021
VIX	207	21.228	6.495	14.539	32.713
Market return	207	0.001	0.029	–0.099	0.067
Oil volatility	207	0.099	0.033	0.052	0.146
Size	207	12.216	0.917	10.148	14.422
Leverage	207	0.213	0.053	0.096	0.420
Market to book	207	1.600	0.424	0.859	3.245
Firms’ flow	207	0.041	0.055	–0.205	0.126
NWC	207	0.028	0.039	–0.128	0.111
R&D	207	0.033	0.048	0.000	0.192
Capital exp.	207	0.050	0.016	0.022	0.120
Acquisition	207	0.010	0.008	0.000	0.036
Market cap.	207	1,259,324	991,091	142,061	4,846,375

Note: This table presents descriptive statistics of the variables used in our analysis. N represents the number of observations for the study period. Mean is the average of our sample. SD represents the sample standard deviation and Min and Max are minimum and maximum, respectively. Detailed definitions of variables are in Table A1.

Empirical Results

The role of mutual fund money flow has become a vital aspect for stakeholders in the financial markets, such as investors, fund managers and financial authorities, due to its direct influence on their actions and decisions given the power the flow has on public firms’ market prices as driven from the demand side. The academic literature provides intensive work that examines the motives for mutual funds flow in developed and developing markets (see, for example, on developed markets: Alsubaiei et al., 2021; Li et al., 2018; Shinozawa & Vivian, 2015; and on emerging markets: Alsubaiei, 2021). For instance, it is proven in the mutual fund literature that fund characteristics such as fund return, size, market return and oil market volatility are the main drivers of fund flow (Alsubaiei, 2022; Alsubaiei et al., 2020; Wang et al., 2018). In contrast, we try to enhance the understanding of fund flow drivers by shedding light on a new variable, corporate cash holding and consider how equity fund flow might be influenced by firms’ behaviour in this regard and the level of cash reported on their financial statements. This section answers the main question that is proposed in this article, as to whether corporate cash holding level impacts fund flow, by using a large worldwide sample. In practice, increasing the level of cash in firms is important to fund flow because (a) individual investors would respond to firms holding more cash as a sign that they expect more risk in the financial markets, and thus they are anticipated to hold their assets rather than investing, and (b) firms are considered as institutional investors, and are key participants in the equity market, which means they reduce their investment percentage in any year that has a higher cash holding. Therefore, as indicated in the hypothesis, a large amount of cash held by firms leads to a decrease in the fund flow.

Table 3 presents the findings of the impact of global firms’ cash holdings on mutual funds flow using multiples of model specifications. We examine this relationship by testing the lagged changes in corporate cash holding on equity funds’ money sensitivity following the existing literature (Alsubaiei et al., 2020, 2021). Model 1 presents the findings of a bivariate regression to examine the effect of cash holdings on the asset allocation decisions of investors in equity funds. We find that the previous year’s cash holding level has significant negative influence on current mutual fund flow for a worldwide sample. Specifically, the result is significant at the 5% level, and the coefficient shows that when firms increase their level of cash by 1%, the equity mutual fund flow level is decreased by 4.4%. The level of corporate cash holdings itself explains more than 3% of funds’ money sensitivity variations.

Table 3.

Mutual Funds Flow and Corporate Cash Holdings.

Variables	(1)	(2)	(3)	(4)	(5)
Cash Lag1	–4.384**	–3.531*	–3.500*	–3.505*	–5.488*
	(2.195)	(2.092)	(2.066)	(2.021)	(2.832)
Flow Lag1		0.280**	0.272**	0.269**	0.194
		(0.129)	(0.128)	(0.126)	(0.126)
Raw Return Lag1			–1.855	–6.380	–6.514
			(4.015)	(10.985)	(10.790)
Risk-adjusted Return Lag1			23.595**	23.853**	18.160
			(11.144)	(11.107)	(11.532)
VIX Lag1				0.015	0.026
				(0.015)	(0.019)
Market Return Lag1				5.308	5.509
				(8.123)	(7.658)
Oil Volatility Lag1				1.841	1.218
				(2.682)	(2.945)
Size Lag1					0.697**
					(0.319)
Leverage Lag1					–6.801*
					(3.569)
Market to Book Lag1					0.699*
					(0.374)
Firms’ Flow Lag1					–3.384*
					(1.999)
NWC Lag1					0.877
					(2.496)
R&D Lag1					–0.512
					(1.919)
Capital Exp. Lag1					5.270
					(5.101)
Acquisition Lag1					–5.721
					(16.171)
Market Cap. Lag1					–0.000**
					(0.000)
Constant	1.100***	0.848**	0.974***	0.463	–7.103**
	(0.375)	(0.363)	(0.346)	(0.294)	(3.503)
Observations	184	184	184	184	184
R-squared	0.034	0.117	0.154	0.173	0.275

Notes: This table reports the results of OLS regressions of the relationship between corporate cash holdings and mutual fund flow. Flow is the net flow into equity mutual fund over 1 year. Cash is defined as cash and cash equivalents divided by total assets. Raw Return is the log return of fund over 1 year before adjusting for the risk-free rate. Risk-adjusted Return is the abnormal return of fund based on the 4-factor model. VIX is the log of the change in stock market volatility index (CBOE). Market Return is the return of the local market index for each country. Constant is the intercept of the model. Detailed definitions of other variables are in Table A1. R-squared is the coefficient of determination. Robust standard errors are reported in parentheses. Statistical significance is represented as ***p < .01, **p < .05, *p < .1.

Models 2 and 3 exhibit the findings of the relationship between firms’ cash level and equity fund flow when controlling for funds’ previous flow and return, as the literature indicates their significant effect on mutual fund flow (Alsubaiei et al., 2020, 2021). Our findings persist after controlling for the past flow, raw return and risk-adjusted return, which indicate that the corporate cash holding has a negative impact on funds flow which confirms our initial findings. Model 4 includes the stock market volatility index, market return and oil volatility to remove the possible effect from the financial markets’ characteristics (Alsubaiei et al., 2020; Wang et al., 2018). The findings support our main outcomes and show the negative relationship between corporate cash holding and mutual fund flow. Finally, the firm-level characteristics are included in the analysis following the literature (Alomran & Alsubaiei, 2022). The results are consistent after including all control variables, which demonstrates the negative impact of firms’ cash holding on the next period’s mutual fund flow.

Overall, the results support our expectation in our hypothesis that when firms hold more cash this can influence the level of money inflow into funds. This outcome can be justified by the following key points: (b) firms are key investors in the financial markets in order to diversify their income basket, and therefore if firms increase their cash level, it means that they decide to reduce their investment size which in turn leads to lower money flow into the financial market from corporates; (b) firms are expected to underperform if they increase their level of cash, due to the cost of carry related to cash holding, and we therefore expect that investors would not direct their cash to the financial markets—including the mutual fund industry—when firms increase their cash holdings because of the expected negative effect on companies’ performance. Thus, our new insight is that corporate cash holding has a negative effect on fund money flow in our global sample.

Robustness Checks

Several additional sets of analysis are implemented to demonstrate the robustness of our findings. First, an alternative measure is applied to estimate the mutual fund flow which is winsorized at the top and bottom 2.5%. Second, we re-estimate our models using time fixed effect. Third, we assess the robustness of our results by fixing the effect for the stage of market development (developed market or developing market). Model 1 in Table 4 shows the results using an alternative estimation of the flow. The findings are in line with our earlier results of a negative relationship between funds’ money flow and corporate cash holdings and the coefficient is statistically significant at the 10% level. In Model 2, we include other control variables, and the results confirm our initial findings by indicating the negative influence firms’ level of cash have on the next period’s money flow into the mutual fund industry. Next, we report our baseline empirical findings after controlling for the time effect. The results persist and confirm our prior findings. Finally, we check for the potential endogeneity using Durbin and Wu–Hausman tests, and both tests suggest there is no concern with endogeneity in our models.

Table 4.

Mutual Funds Flow and Corporate Cash Holdings (Robustness).

Variables	(1)	(2)	(3)	(4)
Cash Lag1	–4.341*	–6.689*	–6.011*	–6.279*
	(2.495)	(3.603)	(3.538)	(3.519)
Flow Lag1	0.354***	0.272**	0.292**	0.292**
	(0.132)	(0.123)	(0.113)	(0.113)
Raw Return Lag1	–13.677	–14.167	7.100	6.084
	(13.985)	(14.065)	(14.408)	(14.312)
Risk-adjusted Return Lag1	40.950***	35.066**	10.624	11.897
	(15.424)	(13.724)	(15.219)	(15.362)
VIX Lag1	0.016	0.029	–4.306	–4.634
	(0.019)	(0.025)	(3.225)	(3.290)
Market Return Lag1	6.103	7.669	11.556	11.928
	(11.203)	(10.563)	(9.990)	(10.138)
Oil Volatility Lag1	2.778	2.130	860.858	915.978*
	(3.439)	(3.764)	(522.364)	(535.523)
Size Lag1		0.966**	0.920**	0.923**
		(0.393)	(0.371)	(0.371)
Leverage Lag1		–7.650*	–7.658*	–7.520*
		(4.048)	(3.894)	(3.963)
Market to Book Lag1		0.817	0.891*	0.884*
		(0.495)	(0.488)	(0.495)
Firms’ Flow Lag1		–6.130**	–4.894*	–4.771*
		(2.881)	(2.658)	(2.677)
NWC Lag1		2.093	0.918	0.934
		(3.259)	(3.099)	(3.116)
R&D Lag1		–1.018	–3.311	–4.046
		(2.313)	(2.346)	(2.969)
Capital Exp. Lag1		7.108	3.524	4.674
		(6.555)	(6.379)	(6.871)
Acquisition Lag1		–12.961	–11.733	–13.284
		(22.177)	(21.210)	(20.969)
Market Cap. Lag1		–0.000**	–0.000**	–0.000**
		(0.000)	(0.000)	(0.000)
Constant	0.727*	–9.832**	3.665	5.779
	(0.392)	(4.343)	(26.721)	(27.046)
Observations	184	184	184	184
R-squared	0.236	0.332	0.405	0.406
Time fixed effect	No	No	Yes	Yes
Developed market fixed effect	No	No	No	Yes

Note: This table shows the results of additional robustness tests of the relationship between corporate cash holdings on mutual fund flow. Flow is the net flow into equity mutual fund over 1 year. Cash is defined as cash and cash equivalents divided by total assets. Raw Return is the log return of fund over 1 year before adjusting for the risk-free rate. Risk-adjusted Return is the abnormal return of fund based on the 4-factor model. VIX is the log of the change in stock market volatility index (CBOE). Market Return is the return of the local market index for each country. Constant is the intercept of the model. Detailed definitions of other variables are in Table A1. Robust standard errors are reported in parentheses. Statistical significance is represented as ***p < .01, **p < .05, *p < .1.

Conclusion

The main aim of this article is to provide a conclusion on whether there is a link between corporate cash holdings and mutual fund flow. We study this relationship using a worldwide sample of 57,406 mutual funds and 13,674 publicly traded firms for 10 years. We build on the understanding of the financial economic mechanisms that drive investors’ decisions when they construct their portfolios and find that the findings are in line with our prediction. Particularly, we find that there is a negative relationship between the level of corporate cash holdings and the mutual fund flow.

The results provide evidence on how firms’ policies regarding their cash holdings influence the equity mutual fund industry. This study provides several explanations for this relationship. On the one hand, a higher level of cash holdings could have a negative influence on firms’ return of assets and could be a signal of the scarcity of investment opportunities, and both these reasons eventually would lead investors to decrease or at least to not increase their investment in the equity mutual fund. On the other hand, as corporate cash holdings increase, firms will pay less dividends which could be invested back by firms’ shareholders into mutual funds. Moreover, corporations are important investors in the mutual fund market, and corporations would invest less in the mutual fund industry as they hoard more cash holdings.

Our findings lead to noteworthy recommendations that can be helpful to mutual fund industry participants. First, asset managers should observe firms’ cash holdings fluctuations to anticipate future money inflow and outflow, which can help them to better adjust their portfolios accordingly. The results are also expected to help investors in making their investment decisions by observing the firms’ corporate cash policies. Our results also provide a better understanding for mutual fund managers on the drivers of fund flow and why they should consider corporate decisions when estimating future in/out flow. Policymakers would benefit from the results of this article as it shows the link between firms’ corporate decisions and the equity mutual fund industry.

The findings reported in this article can lead to new questions for future investigations. An open question that remains unanswered is whether mutual funds’ managers adjust their asset allocation strategies based on firms’ cash holdings levels, which requires access to an extensive dataset on each fund’s holdings. A further question that can be addressed is whether funds’ investors pay attention to funds’ assets focus when they react to cash holding movements, which requires access to funds’ industry focus. Third, future research that could be undertaken as an extension to our study is to determine whether the relationship between fund flow and corporate cash holdings varies based on macro-level factors, such as funds’ sensitivity to the oil market, especially in oil exporting countries, which also requires access to data on funds’ holdings. Finally, as this study shows that firms’ policies could influence mutual fund flow, it is vital to investigate whether corporate-level policies impact fund performance.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

Appendix

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