Pinkowitz , L. and Williamson, R., 2002, What is a Dollar.pdf - What is a Dollar Worth The Market Value of Cash Holdings Lee F Pinkowitz and Rohan

Pinkowitz , L. and Williamson, R., 2002, What is a Dollar.pdf

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What is a Dollar Worth? The Market Value of Cash HoldingsLee F. Pinkowitz and Rohan Williamson*AbstractThis study investigates the market value of cash held by firms. In general, we estimate the value shareholdersplace on a marginal dollar of cash to be about $0.97. However, we find large cross-sectional differencesconsistent with existing theory. We document that the quality and volatility of the firm’s investmentopportunity set as well as the probability of financial distress and capital market access impact the valueshareholders place on cash holdings. Firms with good growth options have their cash valued at a premiumto those with poor growth prospects. Additionally, cash is valued less in firms with stable investmentprograms and those nearer to financial distress. Finally, we find that access to the capital markets affectsshareholder’s valuation of cash holdings, although the results are contrary to expectations. Overall, it appearsthat the investment opportunity set rather than the financing opportunity set of the firm affects the value thatshareholders place on a firm’s cash holdings.JEL Classification: G31Key Words: Cash Holdings, Liquidity, Market Value of Cash * Corresponding Author: Rohan Williamson, Georgetown University, McDonough School of Business, Washington,DC 20057, Phone: (202) 687-2284, Fax (202) 687 - 4031, email: [email protected]Pinkowitz can be reached at (202)687-2689, email:[email protected]We would like to thank George Comer, Allan Eberhart, Prem Jain, Ivo Jansen,Kathy Kahle, Karl Lins, Dawn Porter, René Stulz, Richard Sweeney, Michael Weisbach, and Bennet Zellner for theirvaluable comments and suggestions. We would also like to thank participants at the 2002 Eastern Finance Associationmeeting and seminar participants at American University, Georgetown University, University of Kansas, and theSecurities and Exchange Commission. The authors received research support from the Capital Markets Research Centerat Georgetown University and from the Steers Faculty Research Fellowship provided through the McDonough Schoolof Business. All errors are the responsibility of the authors.
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What is a Dollar Worth? The Market Value of Cash HoldingsAbstractThis study investigates the market value of cash held by firms. In general, we estimate the value shareholdersplace on a marginal dollar of cash to be about $0.97. However, we find large cross-sectional differencesconsistent with existing theory. We document that the quality and volatility of the firm’s investmentopportunity set as well as the probability of financial distress and capital market access impact the valueshareholders place on cash holdings. Firms with good growth options have their cash valued at a premiumto those with poor growth prospects. Additionally, cash is valued less in firms with stable investmentprograms and those nearer to financial distress. Finally, we find that access to the capital markets affectsshareholder’s valuation of cash holdings, although the results are contrary to expectations. Overall, it appearsthat the investment opportunity set rather than the financing opportunity set of the firm affects the value thatshareholders place on a firm’s cash holdings.
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