Misvaluation and the Corporate Propensity to Hold Cash
60 Pages Posted: 19 Jul 2021
Date Written: July 15, 2021
This study adopts a new perspective, misvaluation, to explain corporate propensity to hold cash. We find a strong cross-sectional relationship between misvaluation and the propensity to hold cash, which can be attributed to firms’ equity-raising activities and the exercise of employee stock options. The results are robust after controlling for endogeneity issues. Several additional robustness tests reject alternative explanations, such as precautionary motives, agency conflicts, near-term cash needs, and tax motives. Additionally, the study examines the value of cash and shows that misvaluation can increase the value of cash held by firms that are financially constrained or have greater growth opportunities.
Keywords: Cash holdings, misvaluation, employee stock options
JEL Classification: G30, G31, G32
Suggested Citation: Suggested Citation