Abstract
This study examines how excess cash drives earnings management and firm value in China. Using a fixed effect panel regression on a sample of 12,629 observations covering 300 firms listed in the Shanghai Stock Exchange, we find that excess cash has a positive impact on firm value confirming pecking order theory. Our results show that earnings management has a negative impact on firm value in China, which supports the efficient earnings management view. We find that managers in Chinese firms are less likely to use excess cash for manipulating earnings. We provide empirical evidence that firms with excess cash seem to use it more for precautionary purpose than earnings management and the excess corporate liquidity of Chinese firms is used for value-enhancing activities. The test of robustness using the Instrumental Variable (IV) model confirms the results of the study. Our study merges two areas of corporate finance by incorporating agency problems concerning earnings management and cash holdings.
Highlights
Cash holdings and determination of optimum cash policy is one of the most challenging problems in finance (Myer, 1996)
Using a fixed effect panel regression on a sample of 12,629 observations covering 300 firms listed in the Shanghai Stock Exchange, we find that excess cash has a positive impact on firm value confirming pecking order theory
The correlation matrix shows that excess cash is positively and significantly related to firm value
Summary
Cash holdings and determination of optimum cash policy is one of the most challenging problems in finance (Myer, 1996). The linkage of cash holding to earnings management is unknown and we provide insight into this issue by examining the association between earnings management and excess liquidity in the firm. Holding excess cash can reduce the agency problem between insiders and outside investors (Jensen, 1986; Wan & Cai, 2012), but managers may use cash reserves for their own needs, which has a negative impact on firm value (Jensen, 1986). There is no empirical evidence of the impact of excess cash on earnings management and whether it enhances/reduces the firm value. The primary focus of this study is to explore whether firms with excess cash indulge in earnings management and does it have any impact on firm value in the context of China.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
