Marginal Value Of Cash Holdings Research Articles

Debt maturity and the marginal value of cash holdings

This study investigates the impact of debt maturity on the marginal value of cash holdings. It posits that short-term debt acts as a crucial governance mechanism by reducing agency conflicts and aligning managerial actions with shareholder interests. Using a sample of U.S. public firms, the results indicate that firms with higher proportions of short-term debt have a greater marginal value of cash, reflecting more efficient resource allocation and reduced managerial opportunism. The necessity for frequent capital market interactions associated with short-term debt mitigates agency conflicts. Additionally, the study explores three potential mechanisms: financial constraints, managerial moral hazard, and information asymmetry.

Cash Holdings and Marginal Value of Cash across Different Age Groups of U.S. Firms

Using a sample of 11,365 unique US firms over the period 1966 to 2021, this study examines the relationship between the age of a firm and its cash holdings. We categorize firms as young, mature, or old based on their age or years of operation. Our results show that firm age is one of the important determinants of cash holdings and that managers adjust cash holdings in response to changing financial needs and risks as firms age. We find that young firms tend to hold higher levels of cash than more established firms and that the marginal value of cash holdings is higher for younger firms. This is consistent with the notion that young firms are more focused on growth and investment and may have limited access to external financial resources. In contrast, mature and old firms tend to hold lower cash levels, possibly due to greater financial stability, increased creditworthiness, and a lower need to manage financial risks. Controlling for significant variables, we confirm our findings with the robustness tests. Taking care of the endogeneity issue, we still can confirm that firm age is negatively significant to the level and the marginal value of cash holdings.

Unified government and the value of cash holdings

This study examines the impact of a government regime on cash holdings’ valuation, finding that the marginal value of an extra dollar of cash is 24–26 cents greater when the government is unified. As the degree of political conflicts and economic uncertainty are lower in this regime, greater cash reserves allow firms to alleviate under-investment problems and capture government-driven investment opportunities, leading to an increased marginal value of cash holdings. Taken together, our findings highlight that cash value hinges on the political regime in which firms operate.

Top executive gender, corporate culture, and the value of corporate cash holdings

We document that firms run by female executives are associated with a significantly greater value for their cash holdings. In these firms, the marginal value of one dollar is $1.39, while the comparable value is $0.90 for male managed firms. Further, the marginal value of cash holdings for firms run by female CEOs (CFOs) is $1.56 ($1.47) compared to $0.94 ($0.91) for firms with male CEOs (CFOs). The significant difference in the value of cash holdings may be attributed to the gender-based female executives’ traits that permeate a myriad of corporate decisions with superior outcomes that cumulatively manifest in the market assigning a higher value to cash holdings by these firms. The effect is more pronounced in firms with any of the following characteristics: financially unconstrained, cash distributing, weak governance, low institutional investors’ monitoring, and low audit quality. Adding another new dimension to the literature, we show that corporate culture is a potential determinant of the value of cash holdings. Specifically, we document that female led firms are associated with a more salubrious corporate environment manifesting in a greater value assigned to corporate cash holdings. Our results are robust to a battery of robustness tests.

Corporate codes of ethics and cash holdings: International evidence

AbstractIn the presence of agency costs, managers retain cash for their own benefit at the expense of shareholder wealth. Extending prior literature on the role of corporate governance in mitigating the effects of agency conflicts on corporate cash holdings, we study a governance mechanism that has largely been overlooked, namely, corporate codes of ethics. We find a negative association between code of ethics quality and cash holdings, which suggests that managers hold less cash when the firm has a strong code of ethics in place. The effect is greater when agency costs are elevated due to weaker country‐level investor protections. We also find that payouts and the marginal value of cash holdings to investors are increasing in code quality. Overall, our results are consistent with codes of ethics helping to limit opportunistic behaviour from managers when determining the firm's level of cash holdings.

Protection of trade secrets and value of cash holdings: Evidence from a natural experiment

We examine whether the protection of trade secrets by restricting the mobility of knowledgeable employees through the adoption of the legal Inevitable Disclosure Doctrine (IDD), an exogenous event, increases the marginal value of corporate cash holdings by reducing the uncertainty of future cash flows, and how that value differs across firms in IDD recognizing and non- recognizing states. We find that the marginal value of cash holdings increases (decreases) significantly in states in which the IDD has (not) been recognized through increases (decreases) in firm value and performance. A battery of robustness tests reveals that the effect of the IDD is more pronounced in firms with high R&D activities. Overall, the evidence shows that the IDD acts as a mechanism that inhibits the mobility of key employees and, thus, reduces the probability of the misappropriation of knowledge-based human capital assets. That is, the IDD creates an opportunity for firms to efficiently use cash to increase firm value - rather than using cash to protect trade secrets from rivals.

Stakeholder orientation and the value of cash holdings: Evidence from a natural experiment

We investigate whether and, if so, how stakeholder orientation affects the value of cash holdings by disciplining inefficient management and reducing agency costs. In so doing, we exploit the staggered enactment of constituency statutes across different states as an exogenous shock that increases the degree of stakeholder orientation substantially. Specifically, we gauge the monitoring effect of stakeholders by using the market value of cash framework of Faulkender and Wang (2006). We find that on average the marginal value of cash holdings increases significantly, both statistically and economically, after the passage of constituency statutes. The effect of constituency statutes on the value of cash holdings is stronger for firms with relatively weaker stakeholder power, high agency costs, and high information asymmetry. In subsequent tests, we show that investment efficiency in M&As and capital expenditures has improved significantly after the adoption of constituency statutes suggesting that heightened stakeholder monitoring over investments is a potential channel to enhance the value of cash holdings. Overall, our results suggest that stakeholder orientation increases the value of cash holdings by mitigating agency problems.

Market value of 10-K readability and corporate cash holdings

We investigate the effect of 10-K readability on the association between stock returns and changes in cash holdings and find that readability significantly increases the marginal value of cash holdings (MVCH). The value spread for firms with high-readability reports is about US $0.08 per dollar of cash. This effect is stronger for firms with more severe managerial agency problems, less external monitoring, and greater financial constraints. Additional analyses suggest that the direction of causality runs from readability to the MVCH. We posit that more readable 10-Ks facilitate investors’ monitoring, inducing firms’ efficient cash use.

The negative corporate governance impact of distracted shareholders: evidence from value of cash holdings

ABSTRACT This paper examines whether distracted shareholders reduce firms’ value of cash holdings. Following prior literature, we construct a firm-year level shareholder ‘distraction’ measure, by exploiting exogenous shocks to institutional shareholders’ portfolios. We find that firms with distracted shareholders experience a decrease in the marginal value of cash holdings, which indicates that firms with distracted shareholders are more likely to misallocate company resources due to lack of monitoring. We further find that this effect is more pronounced for firms with low information asymmetry, few product market competitive threats, and high analyst coverage. The results of this paper suggest that institutional investor attention distraction will reduce firms’ monitoring intensity, which exacerbates firms’ opportunistic behaviors.

Impact of Free Cash Flow and the Marginal Value of Cash Holdings on Firms Overinvestment with Respect to Pakistan.

Impact of Free Cash Flow and the Marginal Value of Cash Holdings on Firms Overinvestment with Respect to Pakistan.

Derivatives use and the value of cash holdings: Evidence from the U.S. oil and gas industry

AbstractWe examine the effect of the oil and gas firms' use of derivatives for hedging risks on the marginal value of cash holdings. Analyzing 155 U.S. oil and gas producers from 1998 to 2017, we find that the use of derivatives for hedging risks, especially oil and gas‐related risk, reduces the marginal value of corporate cash holdings. Furthermore, the effect of using derivatives is stronger for firms exposed to higher risk. Our findings imply that cash holdings and derivatives use act as substitutes in hedging risk in this industry.

Anticorruption, Political Connections, and Corporate Cash Policy: Evidence from Politician Downfalls in China

We examine how firms change their cash policies in response to the downfall of corrupt politicians in China. We find that firms connected to their local government increase cash holdings when high-profile politician downfalls occur in the government. Consistent with the precautionary saving argument, the effect is stronger for firms that have greater investment opportunities or face greater financial constraints. Compared to unaffected firms, affected firms save more cash out of cash flows and have a higher marginal value of cash holdings. Overall, we show that the collapse of firms' political connections has significant impacts on those firms' financial policies.

Anticorruption, political connections, and corporate cash policy: Evidence from politician downfalls in China

We examine how firms change their cash policies in response to the downfall of corrupt politicians in China. We find that firms connected to their local government increase cash holdings when high-profile politician downfalls occur in the government. Consistent with the precautionary saving argument, the effect is stronger for firms that have greater investment opportunities or face greater financial constraints. Compared to unaffected firms, affected firms save more cash out of cash flows and have a higher marginal value of cash holdings. Overall, we show that the collapse of firms' political connections has significant impacts on those firms' financial policies.

Audit committee members with CEO experience and the value of cash holdings

PurposeThe purpose of this study is to examine whether the presence of an audit committee (AC) members with Chief Executive Officer (CEO) experience (supervisory experts) affects the market value of cash holdings.Design/methodology/approachTo estimate the marginal value of cash holdings, this study uses the model proposed by Faulkender and Wang (2006). The sample is 2,031 firm-year observations in Korea from 2000 through 2015.FindingsThe authors find that the presence of supervisory experts on ACs has a negative impact on the value of cash holdings. This result suggests that supervisory experts on ACs weaken monitoring of managerial actions. The authors also find that the negative effect of supervisory experts on the value of cash holdings is mitigated when there are other AC members with accounting expertise.Practical implicationsThe findings that AC supervisory expertise impairs the effectiveness of ACs, and thus destroys shareholder value have policy implications because the current regulations in many countries use a broad definition of financial expertise that includes supervisory expertise.Originality/valueThis is the first study that directly examines the effect of AC supervisory expertise on the value of cash holdings. The study also contributes to the literature on the role of ACs in emerging markets by documenting the limitations of corporate governance systems adopted from the Anglo–Saxon model.

Financial Statement Comparability and the Market Value of Cash Holdings

SYNOPSIS We examine how financial statement comparability affects the market value of cash holdings. Using a sample of U.S. firms from 1991 through 2013, we find that the marginal value of cash holdings is higher for firms with financial statements that are more comparable to those of their industry peers. Specifically, a change in our comparability measure from the bottom to the top decile is associated with a 37 to 43 cent increase in the market value of an additional dollar of cash. This result suggests that financial statement comparability mitigates the agency problem associated with cash holdings (i.e., the free cash flow problem) by improving firms' information environments and thus facilitating monitoring of managers.

The Effect of Deviation from Optimal Cash Level on Adverse Selection and Moral Hazard in Firms Listed on Tehran Stock Exchange

This study aims to investigate the impact of deviation from optimal level of cash holdings on adverse selection and moral hazard problems. The data set includes 106 listed firms of Tehran Stock Exchange during the period of 2005-2016 and both panel data and cross-sectional data multivariate regressions were utilized in different stage of analysis to test the hypotheses. According to the optimal level of cash holdings, firms were divided into two groups of firms with or without excess cash holdings. The results of the study revealed that lower optimal level of cash holdings increases adverse selection. In addition, higher optimal level of cash holdings leads to moral hazard. In other words, the findings confirmed both pecking order and free cash flow theories. The findings imply that there is a positive relationship between information asymmetry and marginal value of cash holdings. Such a relationship will gradually decrease when the firms hold higher than optimal level of cash and translate into a negative one.

Analyst expertise and the value of cash holdings

AbstractThis study investigates whether analyst expertise mitigates the value destruction associated with an increase in cash holdings. We find that analyst expertise increases the marginal value of cash holdings, and that this effect is more pronounced for firms in an environment where analysts’ forecasts are more dispersed and for firms with weaker monitoring from institutional shareholders. Overall, our results are consistent with our conjecture that analyst expertise enhances external monitoring, thereby preventing potential misuse of cash holdings and the associated destruction of cash value.

Industry Tournament Incentives and the Product-Market Benefits of Corporate Liquidity

We evaluate the link between chief executive officer (CEO) industry tournament incentives (ITIs) and the product-market benefits of corporate liquidity. We find that ITIs increase the level and marginal value of cash holdings. Furthermore, ITIs strengthen the relation between excess cash and market-share gains, especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITIs lead to increased research and development (R&D) expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITIs increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product-market benefits.

Drop in Overinvestment, Marginal value of Cash Holdings, and Governance System of Companies Listed on Tehran Stock Exchange

Drop in Overinvestment, Marginal value of Cash Holdings, and Governance System of Companies Listed on Tehran Stock Exchange

The Impact of Predation Risk on the Marginal Value of Cash Holdings: An Empirical Perspective

As an important external governance mechanism, product market competition has considerable impact on the marginal value of a company’s cash holdings in various aspects. This paper examines the impact of predatory risk on the marginal value of cash holdings in product market by sampling Chinese A-share listed companies from 2000 to 2013. It shows that the predation risk in the product market increases the marginal value of cash holdings by 0.2 Yuan.