Earnings Transparency and Corporate Cash Holdings

48 Pages Posted: 21 Aug 2016 Last revised: 21 Feb 2017

See all articles by Chenxi Liu

Chenxi Liu

Singapore Management University - Lee Kong Chian School of Business

Date Written: July 31, 2016

Abstract

This paper examines the impact of earnings transparency on corporate cash holdings. Motivated by Barth et al. (2013), who show that firms with less earnings transparency tend to have higher cost of equity, this paper shows that the cross-section differences in earnings transparency cause variations in firm cash holdings because firms with less earnings transparency have more incentives to hold cash in order to avoid costly external financing. Using data of US firms from 1980 to 2013, it is found that earnings transparency is significantly negatively associated with cash reserves. This impact remains significant when corporate governance measures and accounting-based earnings quality measures are accounted for. And this impact is more pronounced in firms with more growth opportunities, more RD expenses and more financial constraints. It is further found that firm with lower earnings transparency have a higher value of cash holdings, suggesting that cash held by firms with lower earnings transparency are expected to be used to invest, which is also a verification that firms with less earnings transparency hold more cash for precautionary motivation.

Keywords: earnings transparency, cash holdings, information asymmetry

JEL Classification: G32 ,G33, M41

Suggested Citation

Liu, Chenxi, Earnings Transparency and Corporate Cash Holdings (July 31, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2824898 or http://dx.doi.org/10.2139/ssrn.2824898

Chenxi Liu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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