Are Excess Cash Holdings More Valuable to Firms in Times of Crisis? Financial Constraints and Governance Matter

Abstract

This study examines the impact of cash holdings on firm value before and during the 2008 financial crisis. In answering this question, our analysis assesses the conditioning effect of financial constraints and corporate governance. In our core finding we show that the equity market places a higher value on corporate cash holdings during the financial crisis. Also, there is some evidence to show cash holdings is more valuable to constrained firms, compared to unconstrained firms. The value impact is also more pronounced during the crisis. The triple-interaction of cash with constraint and crisis effects show a strong negative effect. That is, the crisis value effect for constrained firms is less than that of unconstrained firms. Further, while the governance effect on corporate cash holdings is unclear in the pre-crisis period, it becomes more pronounced and more positive during the financial crisis. Finally, the triple-interaction of excess cash with governance and constraint effects generally show a positive effect, suggesting that the positive governance effect on corporate cash holdings becomes more pronounced for firms that are financially constrained.