Earnings Quality and Corporate Cash Holdings

29 Pages Posted: 21 Apr 2012

See all articles by Qian Sun

Qian Sun

Kutztown University

Kenneth Yung

Old Dominion University - Finance

Hamid Rahman

Alliant International University

Date Written: June 2012

Abstract

Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.

Keywords: Earnings quality, Earnings management, Cash holdings, Value of cash

JEL Classification: G31, G32

Suggested Citation

Sun, Qian and Yung, Kenneth and Rahman, Hamid, Earnings Quality and Corporate Cash Holdings (June 2012). Accounting & Finance, Vol. 52, Issue 2, pp. 543-571, 2012. Available at SSRN: https://ssrn.com/abstract=2042882 or http://dx.doi.org/10.1111/j.1467-629X.2010.00394.x

Qian Sun

Kutztown University

Kutztown, PA 19530
United States

Kenneth Yung

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3573 (Phone)

Hamid Rahman

Alliant International University ( email )

10455 Pomerado Road
San Diego, CA 92131-1799
United States
8586354529 (Phone)

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