Do firms have target cash-to-assets ratio?

This paper tests whether Korean firms have target cash levels. Extant research that estimates linear regression to examine determinants of corporate cash holdings implicitly assumes that firms have optimal amount of cash. However, no research has examined the validity of the assumption. This paper aims to provide empirical evidence for the existence of optimal levels of corporate cash holdings. The results obtained using a first order autoregressive regression model show that cash-to-assets ratio have mean-reverting properties, suggesting that firms have target cash levels. These results reinforce the empirical results of previous papers that have examined the corporate cash holdings, and are supportive of a static tradeoff theory of cash holdings. In addition, this paper finds that the financing hierarchy theory also has some explanatory power for the change in corporate cash holdings.