Value of Cash Holdings: The Impact of Cash from Operating, Investment and Financing Activities

55 Pages Posted: 16 Jan 2012

See all articles by Yenn-Ru Chen

Yenn-Ru Chen

National Chengchi University (NCCU) - Department of Finance

Agnes Cheng

Hong Kong Polytechnic University; University of Oklahama

Yu-Lin Huang

National Cheng Kung University

Date Written: January 11, 2012

Abstract

Although the literature shows the importance of cash sources on corporate cash holdings, no literature ever evaluates the effect of cash sources on the value of cash holdings. This study examines the value of additional cash and its variation with respect to if the cash is generated from corporate operating (CFO), investment (CFI), and financing (CFF) activities. The empirical results show that the marginal value of cash holdings and the marginal rate of change in cash value vary with cash from different corporate activities. Specifically, the marginal value of cash from CFO is higher than the marginal value of cash from CFI or CFF, but the marginal rate of change in cash value decrease more if cash is from CFO. The findings suggest that profitable firms have lower incentive and potentially higher agency problem concern when accumulating cash internally. Extending the literature identifying higher cash value in financially constrained firms and in poorly governed firms, we find that the effect of financial constraints would occur only if cash is not from CFO and the effect of poor governance would occur only if cash is from CFO. Overall, the agency explanation to the value of cash holdings is more pronounced in firms with higher capability of generating cash internally. For firms with better access to external financing for cash holdings, the value of cash holdings is highly determined by the economical rationales of holding large cash.

Keywords: Corporate Cash Holdings, Sources of Cash, Value Relevance, Financial Constraints, Corporate Governance

JEL Classification: G32, G34

Suggested Citation

Chen, Yenn-Ru and Cheng, Agnes and Huang, Yu-Lin, Value of Cash Holdings: The Impact of Cash from Operating, Investment and Financing Activities (January 11, 2012). Available at SSRN: https://ssrn.com/abstract=1985476 or http://dx.doi.org/10.2139/ssrn.1985476

Yenn-Ru Chen (Contact Author)

National Chengchi University (NCCU) - Department of Finance ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan
+886-2-29393091x81246 (Phone)

Agnes Cheng

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

University of Oklahama ( email )

307 West Brooks
Norman, OK 73019-4004
United States

Yu-Lin Huang

National Cheng Kung University ( email )

No.1, University Road
Tainan
Taiwan

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