How Does Firm-Specific Investor Sentiment Affect the Value of Corporate Cash Holdings

Abstract

We document a positive relation between firm-specific investor sentiment (FSIS) and the value of cash. We also show that FSIS has a stronger positive effect on the value of cash than the value of other types of assets, suggesting that our finding is not a simple reflection of firm-level overvaluation. Our finding is robust to alternative measures of change in cash, different cash regimes, FSIS measured by order imbalance, news sentiment, and the tone of earnings conference call transcripts, and controlling for market-wide sentiment, institutional monitoring, corporate governance, and endogeneity. Cross-sectional analyses suggest that the positive relation between FSIS and the value of cash is stronger for firms with better future growth opportunities, larger investment, more innovation activities, higher information asymmetry, and more liquid stocks. Overall, our paper sheds light on the important role of FSIS in corporate outcomes.

Keywords: Firm-specific investor sentiment; Value of cash; Overnight returns; Order imbalance