Accruals quality, financial constraints, and corporate cash holdings

Abstract

Purpose The purpose of this paper is to examine how information asymmetry driven by earnings quality affects corporate cash holdings. It also investigates the role that financial constraints play in this effect. Design/methodology/approach The paper examines a large sample of 6,501 observations of 741 firms listed on Euronext Paris over the period 2000–2015. Earnings quality is computed using the Jones model performance-matched discretionary accruals developed by Kothari et al. (2005): the larger the absolute value of discretionary accruals, the lower the accruals quality. Findings The study finds that firms with poor accruals quality hold more cash and that cash holdings in firms of low reporting quality are higher under financial constraints. These results indicate that firms tend to increase their cash reserves in the presence of high information asymmetry which is notably driven by low accounting quality. The findings also suggest that information asymmetry associated with low reporting quality is greater when firms also have strong financial constraints. The study’s conclusions are consistent with the precautionary motive for cash holdings. Practical implications The results would enhance practitioners’ awareness of the importance of accounting choices in the management of cash policies. It would also give researchers an incentive to further explore how these policies are influenced by the precautionary behavior of managers. Originality/value This paper is the first work to investigate the effect of accruals quality on corporate cash holdings in the French equity market, which typically has a poor information environment resulting in high information asymmetry. Moreover, the role of financial constraints in this effect has not yet been explored.

Earnings management and cash holdings: Evidence from energy firms in Vietnam

“…Consistent with this argument, previous investigations show that cash holdings has a positive relationship with the level of information asymmetry (Al-Najjar & Clark, 2017;Dittmar & Mahrt-Smith, 2007;Dittmar, Mahrt-Smith, & Servaes, 2003;Opler et al, 1999). Furthermore, accruals-based earnings management results in lower financial reporting quality, thus adding to the production of information asymmetry between firms and external capital suppliers (Shin et al, 2017;Mansali et al, 2019).…”

What drives corporate cash holdings in MSMEs?: Evidence from India

“…All other explanatory variables defined in Table 1 are in line with the previous works (Ferreira and Vilela, 2004;Garc ıa-Teruel and Mart ınez-Solano, 2008;Mansali et al, 2019;Opler et al, 1999;Ozkan and Ozkan, 2004).…”

Does earnings quality affect the cost of debt in a banking system? Evidence from French listed companies

“…The DD (2002) model is a regression of working capital accruals on lagged, current, and future cash flows plus the change in revenues and property, plant, and equipment (PPE). The following model is estimated cross-sectionally in each industry-year with a minimum of eight observations per year in any industry (Mansali et al, 2019) using OLS regression. Industry is defined according to Campbell’s (1996) industry classification of 11 groups.…”