Misvaluation and the Corporate Propensity to Hold Cash

60 Pages Posted: 19 Jul 2021

See all articles by Hsuan-Chi Chen

Hsuan-Chi Chen

University of New Mexico

Robin K. Chou

National Chengchi University (NCCU)

Chien-Lin Lu

National Ilan University

Date Written: July 15, 2021

Abstract

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

Chen, Hsuan-Chi and Chou, Robin K. and Lu, Chien-Lin, Misvaluation and the Corporate Propensity to Hold Cash (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3887403 or http://dx.doi.org/10.2139/ssrn.3887403

Hsuan-Chi Chen

University of New Mexico ( email )

107 Humanitites Building
Albuquerque, NM 87131-1221
United States

Robin K. Chou

National Chengchi University (NCCU) ( email )

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei, 11623
Taiwan

Chien-Lin Lu (Contact Author)

National Ilan University ( email )

Yilan
Taiwan

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