Abstract
In this study we analyze the effect of information asymmetry on corporate cash holdings. Using various measures of information asymmetry, we show that companies that operate in higher information asymmetry environments have smaller cash holdings. We continue to find a negative relation between information asymmetry and corporate cash holdings from a battery of sensitivity analyses, including the tests using different regression methods and the difference-in-difference tests employing brokerage-firm merger and closure events. On the whole, our results support the monitoring cost hypothesis of cash holdings over the investment opportunities hypothesis.
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