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Easy Come, Easy Go: Cheap Cash and Bad Corporate Decisions

Igor Cunha

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, G35

working papers series

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Date posted: October 25, 2012 ; Last revised: December 18, 2013

Suggested Citation

Cunha, Igor, Easy Come, Easy Go: Cheap Cash and Bad Corporate Decisions (December 17, 2013). Available at SSRN: http://ssrn.com/abstract=2167060 or http://dx.doi.org/10.2139/ssrn.2167060

Contact Information

Igor Cunha (Contact Author)
Nova School of Business and Economics ( email )
Faculdade de Economia da UNL (NOVASBE)
Campus de Campolide
Lisbon, 1099-032
+351 213801693 (Phone)
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Downloads: 194
Download Rank: 86,771
References:  24
Footnotes:  5

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