Excess Cash Holdings and Shareholder Value

37 Pages Posted: 12 Apr 2010  

Edward Lee

affiliation not provided to SSRN

Ronan Powell

University College Dublin (UCD) - Michael Smurfit Graduate School of Business

Date Written: April 7, 2010

Abstract

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

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

Edward Lee

affiliation not provided to SSRN ( email )

Ronan G. Powell (Contact Author)

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

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