Geographic diversification and corporate cash holdings

This study examines the impact of geographic diversification on corporate cash holdings and provides supportive evidence for the precautionary saving theory. Firms can reduce their exposure to state-specific idiosyncratic risk and smooth their cash flows through geographic diversification, and therefore have a lower precautionary demand for cash. Using a novel measure that captures the degree of geographic diversification, we find that geographically diversified firms hold less cash than non-diversified ones. We provide further insights into this precautionary saving motive by documenting that the relation between geographic diversifica-tion and cash holdings becomes more pronounced for financially constrained firms and firms with active internal capital markets. Additional examination of cash sources and cash savings behavior suggests that the reduction of equity issuance and the declining cash savings rates help explain the lower cash holdings in geographically diversified firms.