We would like to thank two anonymous referees and the editor for their insightful comments that helped us to upgrade the paper.
Earnings quality and corporate cash holdings
Version of Record online: 12 JAN 2011
© 2011 The Authors. Accounting and Finance © 2011 AFAANZ
Accounting & Finance
Volume 52, Issue 2, pages 543–571, June 2012
How to Cite
Sun, Q., Yung, K. and Rahman, H. (2012), Earnings quality and corporate cash holdings. Accounting & Finance, 52: 543–571. doi: 10.1111/j.1467-629X.2010.00394.x
- Issue online: 19 APR 2012
- Version of Record online: 12 JAN 2011
- Received 12 May 2009; accepted 17 Dec 2010 by Michael Bradbury (Deputy Editor).
- Earnings quality;
- Earnings management;
- Cash holdings;
- Value of cash
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.