We investigate the tradeoff theory as an explanation for how managers allocate cash to post-spin-off parent and subsidiary firms. Spin-offs provide an opportunity to examine the determinants of cash holdings free from the confounding effects of the pecking order theory. Our results indicate that difference in asset size, sales growth, research and development expenses, net working capital, and leverage significantly affect the difference in cash holdings of post-spin-off entities. These results suggest that cash holdings are decreasing in the ease of raising cash and availability of cash from internal sources, and are increasing in growth opportunities, asymmetric information levels, and financial distress costs.
D'Mello, Ranjan; Krishnaswami, Sudha; and Larkin, Patrick J., "An Analysis of the Corporate Cash Holding Decision" (2005). Department of Economics and Finance Working Papers, 1991-2006. Paper 35.