Abstract
This research aims to examine the implications of excess cash holdings on firm value based on agency theory. Data were obtained from a total sample of 1828 non-financial public companies in Indonesia, with 672 exceeding normal cash holdings using the panel regression techniques. The result showed that excess cash holdings have a negative effect on the firm value which is stronger for more concentrated ownership, for more dispersed ownership and for more financially difficult firms. Overall the empirical finding showed that excess cash holdings acts as a significant indicator of agency problems.
Highlights
Company managers need to properly allocate cash holdings to maximize the wealth of its shareholders by balancing the costs and marginal benefits using the right allocation strategy (Opler et al, 1999)
This argument is in line with Simutin's (2010) and Khieu & Phyles (2012) opinion, which stated that the agency problem tends to exist due to excess cash holdings
The findings prove that excess cash holdings negatively affect the value of a company, it is a significant clue in supporting the agency hypothesis
Summary
Company managers need to properly allocate cash holdings to maximize the wealth of its shareholders by balancing the costs and marginal benefits using the right allocation strategy (Opler et al, 1999). Cash holdings are accumulated to anticipate future investment opportunity with higher values (Mikkelson & Partch (2003), Simutin (2012), and Faulkender & Wang (2006)) According to Livdan et al (2009), the effects of financial constraints on risk, showed that excess cash holdings contain information used to reduce financial constraints. Excess cash holdings are company resources that are not aligned with the interests of its shareholders (Jensen (1986); & Stulz (1990)). This argument is in line with Simutin's (2010) and Khieu & Phyles (2012) opinion, which stated that the agency problem tends to exist due to excess cash holdings
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