Aggressive Real Earnings Management and the Value of Firm Cash Holdings
49 Pages Posted: 10 Dec 2016
Date Written: December 7, 2016
I examine whether aggressive income-increasing real earnings management (REM) influences the value of firm cash holdings. Motivated by agency problems of REM and free cash flows, I predict that aggressive cuts in discretionary expenditures have a negative effect on the marginal value of cash holdings. Using an abnormal returns model, my analysis documents that investors place a lower value on cash holdings of aggressive income-increasing REM firms. Economically, these results indicate that the marginal value of cash holdings is 16 cents lower in aggressive REM firms relative to non-aggressive REM firms. I also examine subsamples with positive abnormal cash holdings, higher incentives for REM, and different investment environments and find evidence consistent with my main results. Findings in my study contribute to two lines of research by documenting that REM influences the value that investors place on firm cash holdings.
Keywords: Real Earnings Management, Value of Cash Holdings, Agency costs
JEL Classification: G30, G34, M41
Suggested Citation: Suggested Citation