Easy Come, Easy Go: Cheap Cash and Bad Corporate Decisions
Nova School of Business and Economics
December 17, 2013
This paper investigates the relation between the sources of cash reserve and firm's investment decisions. I explore the information on the cash flow statement to organize cash holding by its source: Financing, Operating or Investment activity. I find that the overspending evidence previously associated to firms with large cash holdings are driven by firms with high cash reserves coming from operations. My evidence is consistent with theories of the disciplinary effects of external financing. Furthermore, I show that manager's perception of the opportunity costs of their cash reserves affects their investment decisions, and can represent an additional source of agency problems.
Number of Pages in PDF File: 56
Keywords: Cash Holdings, Merger and Acquisitions, Share Repurchase, Market Timing, Cost of Capital, Agency
JEL Classification: G30, G31, G32, G34, G35working papers series
Date posted: October 25, 2012 ; Last revised: December 18, 2013
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