37 Pages Posted: 12 Apr 2010
Date Written: 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.
Keywords: Transactions cost, Trade-off, Stock performance, Marginal value of cash, Persistence
JEL Classification: G14, G34
Suggested Citation: Suggested Citation
By Amir Sufi