The Effect of Financial Constraints, Investment Policy, Product Market Competition and Corporate Governance on the Value of Cash Holdings

28 Pages Posted: 4 May 2013

See all articles by H. Chan

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Yufei Lu

Deakin University - Faculty of Business and Law

Hong Feng Zhang

Deakin University - Deakin Business School

Date Written: June 2013

Abstract

This study empirically investigates the value shareholders place on excess cash holdings and how shareholders’ valuation of cash holdings is associated with financial constraints, firm growth, cash‐flow uncertainty and product market competition for Australian firms from 1990 to 2007. Our results indicate that the marginal value of cash holdings to shareholders declines with larger cash holdings and higher leverage. However, firms that are more financially constrained, that have higher growth rates and that face greater uncertainty exhibit a higher marginal value of cash holdings. These findings are consistent with the explanation that excess cash holdings are not necessarily detrimental to firm value. Firms with costly external financing and that also save more cash for current operating and future investing needs find that the market values these cash hoarding policies favourably. Finally, there is limited evidence of an association between various corporate governance measures and the value of cash holdings for a shorter sample period.

Keywords: Financial constraints, Cash policy, Australian firms

JEL Classification: G31, G32

Suggested Citation

Chan, Howard and Lu, Yufei and Zhang, Hong Feng, The Effect of Financial Constraints, Investment Policy, Product Market Competition and Corporate Governance on the Value of Cash Holdings (June 2013). Accounting & Finance, Vol. 53, Issue 2, pp. 339-366, 2013. Available at SSRN: https://ssrn.com/abstract=2260628 or http://dx.doi.org/10.1111/j.1467-629X.2011.00463.x

Howard Chan (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Yufei Lu

Deakin University - Faculty of Business and Law

Burwood, Victoria 3215
Australia

Hong Feng Zhang

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

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