Cash Regimes and the Marginal Value of Cash

CEO overconfidence and the value of corporate cash holdings

“…To investigate these questions, we rely on one obvious dimension where the empirical predictions of overinvestment and costly external finance hypotheses differ; that is the value that the market assigns to firm's cash holding. Furthermore, Halford et al (2017) emphasize that the marginal value of cash holdings offers an appealing tool to investigate the value consequences of various firm outcomes and environments. In addition, as pointed out by Halford et al (2017), the reasons are that cash is comparable across firms, and it can be quickly deployed either to exacerbate overinvestment by the funding of value-destructive projects or to alleviate underinvestment by the exploitation of valuable growth opportunities.…”

Institutional Investor Monitoring Motivation and the Marginal Value of Cash

“…Dittmar and Mahrt-Smith (2007) find that corporate governance measured by anti-takeover indexes and blockholder ownership improves the marginal value of corporate cash holdings. However, Halford et al (2016) show that the positive relation between corporate governance and the marginal value of cash is not robust after accounting for ex post classified cash regimes. We find that not only does motivated monitoring IO improve the marginal value of cash after controlling for the anti-takeover indexes and blockholder ownership, but also that this positive effect remains statistically significant in Halford et al's (2016) raising cash and distributing cash regimes.…”

“…Our untabulated results show that M M IO 1 has a positive effect on the marginal value of cash across the three cash regimes defined by Faulkender and Wang (2006). Halford et al (2016) assume that stock prices can unbiasedly incorporate firms' actions in the future and use an ex post classification to group firms into the following three cash regimes. First, firms that issue equity and do not pay dividends in fiscal year t are within the raising cash regime in that year.…”

“…18 A firm may be classified into different cash regimes according to the classifications of Faulkender and Wang (2006) and Halford et al (2016). It is not our paper's objective to compare these two classifications.…”

“…Third, our paper adds to the previous literature that examines the determinants of the value of corporate cash holdings, such as corporate financial policy (Faulkender and Wang, 2006), corporate governance (Dittmar and Mahrt-Smith, 2007), financial constraints and investment opportunities (Denis and Sibilkov, 2009), firm-specific and time-varying information asymmetry (Drobetz et al, 2010), corporate diversification (Duchin, 2010;Tong, 2011), accounting conservatism (Louis et al, 2012), credit rights (Kyröläinen et al, 2013), product market competition (Alimov, 2014), refinancing risk (Harford et al, 2014), the adoption of state-level business combination laws (Fich et al, 2016), internal control over financial reporting (Gao and Jia, 2016), and cash regimes (Halford et al, 2016).…”