Value of Cash Holdings and Accounting Conservatism

Henock Louis
Pennsylvania State University - Smeal College of Business

Amy X. Sun
Pennsylvania State University - Department of Accounting

Oktay Urcan
London Business School


August 13, 2009

AAA 2010 Financial Accounting and Reporting Section (FARS) Paper

Abstract:      
We posit that accounting conservatism could mitigate the value destruction associated with an increase in cash holdings. Consistent with this conjecture, we find that the market value of an additional dollar in cash holding increases in accounting conservatism. This result is robust to controlling for earnings quality, governance quality, fixed effects, and other relevant variables. We also find that accounting conservatism has a positive effect on the association between excess cash holdings and future operating performance. Overall, the evidence suggests that accounting conservatism is associated with a more efficient use of cash holdings, supporting the notion that accounting conservatism can serve as a substitute for external monitoring and reduce agency costs. Number of Pages in PDF File: 41
Keywords: Cash holdings, Accounting conservatism, Agency costs
JEL Classifications: M41, G30, G32
Working Paper Series
Date posted: June 11, 2009 ; Last revised: December 08, 2009