corporate_cash_holding_and_firm_value - CORPORATE CASH...

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1 CORPORATE CASH HOLDING AND FIRM VALUE Cristina Martínez-Sola Dep. Business Administration, Accounting and Sociology University of Jaén Jaén (SPAIN) E-mail: [email protected] Pedro J. García-Teruel Dep. Management and Finance University of Murcia Murcia (SPAIN) Tel: +34 968367828 Fax: +34 968367537 E-mail: [email protected] Pedro Martínez-Solano Dep. Management and Finance University of Murcia Murcia (SPAIN) Tel: +34 968363747 Fax: +34 968367537 E-mail: [email protected] ABSTRACT The aim of this paper is to contrast the effect of cash holding on firm value for a sample of US industrial firms over the period 2001-2007. In order to do this, we first empirically test the existence of an optimal cash level that maximizes firm value. Secondly, we analyze whether deviations from the optimum cash level reduce firm value. Our results show a concave relation between cash holding and firm value, verifying that there is an optimal level of cash holding. Additionally, and consistent with the initial analysis, we also find that deviations above and below optimal cash holding decrease firm value. KEYWORDS: cash holdings, firm value, asymmetric information JEL classification: G30, G31 ACKNOWLEDMENT: We acknowledge financial support from Fundación Séneca Science and Technology Agency of the Region of Murcia (Spain)- (Program: PCRTRM 07-10). Research project 08822/PHCS/08. We also acknowledge support from Fundación CajaMurcia . Corresponding author: Pedro Martínez Solano, Dept. Management and Finance, Faculty of Economics and Business, University of Murcia, Murcia (30100), Spain. E- mail: [email protected]
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2 CORPORATE CASH HOLDING AND FIRM VALUE 1. INTRODUCTION In the recent years there has been a growing interest in corporate cash holdings in the finance literature. This interest has been especially motivated by the fact that corporations hold significant amounts of cash in their balance sheets. Specifically, Dittmar and Marth-Smith (2007) state that in 2003, the sum of all cash and marketable securities represented more than 13% of the sum of all assets for large publicly traded US firms. From another perspective, the aggregate cash held by publicly traded US firms in 2003 represents approximately 10% of annual US GDP. Consequently, the cash reserves held by a firm are a relevant factor of study and one that affects firm’s value. The first studies focus on this topic looked at the determinants of corporate cash holdings (Kim, Mauer, and Sherman, 1998, Opler, Pinkowitz, Stulz, and Williamson, 1999 Ozkan and Ozkan, 2004; Ferreira and Vilela, 2004; Garcia-Teruel and Martinez- Solano, 2008). Most of these papers have considered that a target cash level exists, proving that cash decisions follow a partial adjustment model, though there is no empirical evidence to justify why firms follow a partial adjustment model. Following this line of research, recent papers have investigated the value of cash from different perspectives. Specifically, Pinkowitz, Stulz and Williamson (2006) estimate the
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This note was uploaded on 10/25/2011 for the course FIN 32115 taught by Professor Jameskhule during the Spring '10 term at CSU Sacramento.

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corporate_cash_holding_and_firm_value - CORPORATE CASH...

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