The effect of financial constraints, investment policy, product market competition and corporate governance on the value of cash holdings


  • We thank Jim Psaros for the use of the Horwath Corporate Governance data. Also, we thank an anonymous Accounting and Finance reviewer, Robert Faff (the editor), conference participants at the AsianFA 2011 annual meeting and the AFAANZ 2011, and seminar participants at the University of Newcastle and the University of Queensland for their helpful comments and suggestions.


This study empirically investigates the value shareholders place on excess cash holdings and how shareholders’ valuation of cash holdings is associated with financial constraints, firm growth, cash-flow uncertainty and product market competition for Australian firms from 1990 to 2007. Our results indicate that the marginal value of cash holdings to shareholders declines with larger cash holdings and higher leverage. However, firms that are more financially constrained, that have higher growth rates and that face greater uncertainty exhibit a higher marginal value of cash holdings. These findings are consistent with the explanation that excess cash holdings are not necessarily detrimental to firm value. Firms with costly external financing and that also save more cash for current operating and future investing needs find that the market values these cash hoarding policies favourably. Finally, there is limited evidence of an association between various corporate governance measures and the value of cash holdings for a shorter sample period.