Value of Cash Holdings and Accounting Conservatism
Pennsylvania State University - Smeal College of Business
Amy X. Sun
Pennsylvania State University - Department of Accounting
London Business School
August 16, 2011
AAA 2010 Financial Accounting and Reporting Section (FARS) Paper
We posit that accounting conservatism could mitigate the value destruction associated with increases in cash holdings. Consistent with this conjecture, we find that the market value of an additional dollar in cash holdings increases in accounting conservatism. This result is robust to controlling for strength of corporate governance, earnings quality, past stock performance, potential unobserved firm heterogeneity, potential endogenous changes in conservatism, and other relevant variables. Overall, the evidence suggests that accounting conservatism is associated with a more efficient use of cash holdings, supporting the notion that accounting conservatism can serve as a substitute for external monitoring and reduce agency conflicts between managers and shareholders.
Number of Pages in PDF File: 40
Keywords: Cash holdings, Accounting conservatism, Agency costs
JEL Classification: M41, G30, G32working papers series
Date posted: June 11, 2009 ; Last revised: August 25, 2011
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