Aggressive Real Earnings Management and the Value of Firm Cash Holdings

49 Pages Posted: 10 Dec 2016

See all articles by Adam J. Greiner

Adam J. Greiner

University of Denver - Daniels College of Business

Date Written: December 7, 2016

Abstract

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

Greiner, Adam J., Aggressive Real Earnings Management and the Value of Firm Cash Holdings (December 7, 2016). Available at SSRN: https://ssrn.com/abstract=2882087 or http://dx.doi.org/10.2139/ssrn.2882087

Adam J. Greiner (Contact Author)

University of Denver - Daniels College of Business ( email )

2201 S. Gaylord St
Denver, CO 80208-2685
United States

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