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Excess Cash Holdings and Shareholder Value

Edward Lee

affiliation not provided to SSRN

Ronan Powell

Dublin City University; UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

April 7, 2010

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 who 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.

Number of Pages in PDF File: 37

Keywords: Transactions cost, Trade-off, Stock performance, Marginal value of cash, Persistence

JEL Classification: G14, G34

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Date posted: April 12, 2010  

Suggested Citation

Lee, Edward and Powell, Ronan, Excess Cash Holdings and Shareholder Value (April 7, 2010). Available at SSRN: http://ssrn.com/abstract=1585623 or http://dx.doi.org/10.2139/ssrn.1585623

Contact Information

Edward Lee
affiliation not provided to SSRN ( email )
Ronan G. Powell (Contact Author)
Dublin City University ( email )
Ireland 9
Dublin 9, leinster 9
UNSW Australia Business School, School of Banking and Finance ( email )
Sydney, NSW 2052

Financial Research Network (FIRN) ( email )
C/- University of Queensland Business School
St Lucia, 4071 Brisbane

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References:  29
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