Window Dressing in Corporate Cash Holdings: Evidence from Quarterly Financial Statements

Abstract

This paper finds a strong evidence of upward window dressing in cash holdings by U.S. industrial firms during the fourth fiscal quarter. The window dressing behavior is robust to several controls such as cash holdings determinants, firm characteristics, and a December year-end dummy. Further cross-sectional analysis reveals that the upward window dressing in corporate cash holdings towards the fiscal year-end is sensitive to firm size and, to some extent, the level of information asymmetry. Moreover, the results show that firm manipulate discretionary accruals to dress up the fourth quarter cash holdings. Finally, the analysis illustrates that the fourth quarter window dressing in cash holdings may provide favourable credit terms for issuing short-term debt. Overall, the study confirms that managers of industrial firms manipulate financial information systematically to report higher than actual cash holdings during the fourth fiscal quarter.