Why Does the Marginal Value of Cash to Shareholders Vary Over Time?

45 Pages Posted: 31 Jul 2012 Last revised: 24 Dec 2013

See all articles by Michael O'Connor Keefe

Michael O'Connor Keefe

Victoria University of Wellington

Robert L. Kieschnick

University of Texas at Dallas

Date Written: December 24, 2013

Abstract

We decompose the effect of changing macroeconomic conditions and firm characteristics on the market value of U.S. firms’ cash holdings from 1971 through 2009. We find that, ceteris paribus, the market value of a $1 increase in cash holdings is (i) 11.4‹ higher during economic expansions, (ii) 12.3‹ higher for young firms, (iii) 13.2‹ higher for firms with high cash flow volatility, (iv) 23.1‹ higher for small firms that engage in research and development, (v) 17.7‹ higher for firms with high capital expenditures, and (vi) 23.4‹ higher for firms in that engage in R&D and are in top tercile of capital expenditures. Overall, our evidence suggests the marginal value of cash is positively associated with expanding economic states, investment opportunities, and measures of firm-level financial constraints.

Keywords: Cash, Financial Flexibility, Agency Costs, Macroeconomic Conditions

JEL Classification: G32, E32, G14

Suggested Citation

O'Connor Keefe, Michael and Kieschnick, Robert L., Why Does the Marginal Value of Cash to Shareholders Vary Over Time? (December 24, 2013). Available at SSRN: https://ssrn.com/abstract=2120902 or http://dx.doi.org/10.2139/ssrn.2120902

Michael O'Connor Keefe (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Robert L. Kieschnick

University of Texas at Dallas ( email )

800 W. Campbell Rd, SM31
Richardson, TX 75080
United States
972-883-6273 (Phone)

HOME PAGE: http://www.utdallas.edu/~rkiesch/

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