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Earnings quality and corporate cash holdings
Author(s) -
Sun Qian,
Yung Kenneth,
Rahman Hamid
Publication year - 2012
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.2010.00394.x
Subject(s) - earnings , earnings quality , business , cash , enterprise value , operating cash flow , quality (philosophy) , information asymmetry , monetary economics , value (mathematics) , agency (philosophy) , finance , economics , accrual , philosophy , epistemology , machine learning , computer science
Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.