Abstract
Although the literature shows the importance of cash sources on corporate cash holdings, no literature ever evaluates the effect of cash sources on the value of cash holdings. This study examines the value of additional cash and its variation with respect to if the cash is generated from corporate operating (CFO), investment (CFI), and financing (CFF) activities. The empirical results show that the marginal value of cash holdings and the marginal rate of change in cash value vary with cash from different corporate activities. Specifically, the marginal value of cash from CFO is higher than the marginal value of cash from CFI or CFF, but the marginal rate of change in cash value decrease more if cash is from CFO. The findings suggest that profitable firms have lower incentive and potentially higher agency problem concern when accumulating cash internally. Extending the literature identifying higher cash value in financially constrained firms and in poorly governed firms, we find that the effect of financial constraints would occur only if cash is not from CFO and the effect of poor governance would occur only if cash is from CFO. Overall, the agency explanation to the value of cash holdings is more pronounced in firms with higher capability of generating cash internally. For firms with better access to external financing for cash holdings, the value of cash holdings is highly determined by the economical rationales of holding large cash.
Published Version
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