Abstract
This paper investigates the value of cash for a broad international sample consisting of 7,474 firms from 45 countries over the 1995 to 2005 period. In contrast to previous papers which mostly focus on the marginal value of cash with respect to different corporate governance regimes, we study the marginal value of cash in connection with firm-specific and time-varying information asymmetry. We test two contradictory hypotheses. According to the pecking order theory, asymmetric information leads to adverse selection and provides a value-increasing role for internal funds. However, the free cash flow theory predicts that abundant cash bundled with asymmetric information leads to moral hazard and consequently to a lower marginal value of cash. Our results indicate that information asymmetry decreases the marginal value of cash and thus strongly support the free cash flow theory. This evidence is further emphasized by splitting the data according to governance measures.
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