Deviations from optimal corporate cash holdings and the valuation from a shareholder's perspective

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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 languageUndefined
Pages (from-to)3695-3707
Number of pages13
JournalApplied Economics
Volume46
Issue number30
DOIs
Publication statusPublished - 14 Jul 2014

Keywords

  • corporate cash holdings
  • trade-off theory

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