Abstract
The trade-off theory of corporate cash holdings predicts that there is an optimal level of cash. We test the trade-off theory by investigating the relation between deviations from optimal cash holdings and the valuation of cash from a shareholder’s perspective. We decompose corporate cash holdings into the optimal level of cash and the deviations from the optimum. We find that the marginal value of cash for shareholders is higher when a change in cash moves corporate cash holdings towards the optimal level and that this relationship holds for both the above-optimal deviations and the below-optimal deviations. We conclude that the results are consistent with the prediction of the trade-off theory of corporate cash holdings.
Original language | Undefined |
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Pages (from-to) | 3695-3707 |
Number of pages | 13 |
Journal | Applied Economics |
Volume | 46 |
Issue number | 30 |
DOIs | |
Publication status | Published (in print/issue) - 14 Jul 2014 |
Keywords
- corporate cash holdings
- trade-off theory