Earnings quality and corporate cash holdings

Qian Sun · Kenneth K. Yung · Hamid Rahman

125 citations0/0 files storedAccounting and Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

Abstract Poor earnings quality exacerbates information asymmetry between internal and external stakeholders of a firm. Agency considerations then persuade investors to discount the value of corporate cash holdings out of concern about the inappropriate use of funds. In this study, we show that poor earnings quality has a negative impact on the value of corporate cash holdings and a positive impact on the level of cash reserves. We find that the negative effect of poor earnings quality either neutralizes or more than offsets the positive effect of excess cash on firm value. Our results are robust to several measures of earnings quality and model specifications.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1992The Cross-Section of Expected Stock Returns 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1973Risk, Return, and Equilibrium: Empirical Tests 1996Agency costs of free cash flow, corporate finance, and takeovers 1986Large Shareholders and Corporate Control 1991Earnings Management During Import Relief Investigations 1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have

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