Effect of Cash Holding Policy of Financially Constrained Firms on Their Market Performance

Abstract

Our study is based on the methodology suggested by Faulkender and Wang (2006) in the Indian context, to discuss the various aspects of cash holding policy with respect to financially constrained (FC) and unconstrained firms. Primary goal of the study is to understand shareholders’ perception on the level of cash holdings in constrained and unconstrained firms, and how much value they give to excess cash holdings with respect to cash level and capital structure of a firm. This study also analyzes the shareholders’ perception, which is measured by stock return, and market value of asset, by determining the variation, in excess return and Tobin’s Q over the last 10 years. The result shows less or no effect of excess cash holding either in average firms or in constrained firms. Findings also suggests that shareholders, prefer large firms to maintain excess cash for investment, or to fulfil their liabilities on time. Overall the findings determine the importance of cash level but also indicate the presence of other determinants of the firms, to enhance market return and build shareholders perception.