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Excess cash holdings and shareholder value
Author(s) -
Lee Edward,
Powell Ronan
Publication year - 2011
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.2010.00359.x
Subject(s) - cash and cash equivalents , cash , operating cash flow , cash management , cash conversion cycle , cash on cash return , cash flow forecasting , cash flow statement , monetary economics , economics , business , terminal value , marginal value , shareholder , excess return , finance , corporate governance , microeconomics , paleontology , context (archaeology) , biology
We examine the determinants of corporate cash holdings in Australia and the impact on shareholder wealth of holding excess cash. Our results show that a trade‐off model best explains the level of a firm’s cash holdings in Australia. We find that ‘transitory’ excess cash firms earn significantly higher risk‐adjusted returns compared to ‘persistent’ excess cash firms, suggesting that the market penalises firms that hoard cash. The marginal value of cash also declines with larger cash balances, and the longer firms hold on to excess cash. The results are consistent with agency costs associated with persistence in excess cash holdings.