Are Excess Cash Holdings More Valuable to Firms in Times of Crisis? Financial Constraints and Governance Matter

49 Pages Posted: 15 Feb 2014 Last revised: 17 Mar 2014

See all articles by Yanhao Chang

Yanhao Chang

University of Queensland

Karen L. Benson

University of Queensland - Business School; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland

Multiple version iconThere are 2 versions of this paper

Date Written: February 14, 2014

Abstract

This study examines the impact of cash holdings on firm value before and during the 2008 financial crisis. In answering this question, our analysis assesses the conditioning effect of financial constraints and corporate governance. In our core finding we show that the equity market places a higher value on corporate cash holdings during the financial crisis. Also, there is some evidence to show cash holdings is more valuable to constrained firms, compared to unconstrained firms. The value impact is also more pronounced during the crisis. The triple-interaction of cash with constraint and crisis effects show a strong negative effect. That is, the crisis value effect for constrained firms is less than that of unconstrained firms. Further, while the governance effect on corporate cash holdings is unclear in the pre-crisis period, it becomes more pronounced and more positive during the financial crisis. Finally, the triple-interaction of excess cash with governance and constraint effects generally show a positive effect, suggesting that the positive governance effect on corporate cash holdings becomes more pronounced for firms that are financially constrained.

Keywords: cash holdings; firm value; financial crisis; financial constraints; corporate governance.

JEL Classification: G30; G34

Suggested Citation

Chang, Yanhao and Benson, Karen L. and Faff, Robert W., Are Excess Cash Holdings More Valuable to Firms in Times of Crisis? Financial Constraints and Governance Matter (February 14, 2014). Asian Finance Association (AsianFA) 2014 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2395839 or http://dx.doi.org/10.2139/ssrn.2395839

Yanhao Chang

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Karen L. Benson (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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