The Real Option Value of Cash*

Kisser, Michael

doi:10.1093/rof/rfs034

Cited by 18 publications

(9 citation statements)

References 41 publications

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“…22 higher retained earnings at higher volatility levels. This result is in line with Kisser (2013). However, in our case, it is driven by operating default risk regardless of whether there is a growth option.…”

Section: Accepted Manuscriptsupporting

confidence: 89%

“…Our model goes beyond theirs to also allow for default risk and the effects of bankruptcy costs. Kisser (2013) also recognizes that cash holdings have real option value as they can be used to avoid or reduce issuance costs, but he does not explicitly address the role of default risk, debt issuance and bankruptcy costs. His model assumes quadratic agency costs of free-cash flow, amplifying agency costs when cash balances are high.…”

Section: Accepted Manuscriptmentioning

confidence: 99%

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Corporate liquidity and dividend policy under uncertainty

Koussis

Martzoukos

Trigeorgis

2017

Journal of Banking & Finance

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We examine optimal liquidity (retained earnings) and dividend choice incorporating debt financing with risk of default and bankruptcy costs as well as growth options under revenue uncertainty. We revisit the conditions for dividend policy irrelevancy and the broader role of retained earnings and dividends.Retained earnings have a net positive impact on firm value in the presence of growth options, high external financing costs and low default risk. High levels of retained earnings enhance debt capacity but have a negative effect on equity value due to the likelihood of losing accumulated cash balances in case of default, unless offset by high external financing costs. Opposite directional effects of retained earnings on equity and debt create a U-shaped relation with firm value. The framework is extended to analyze management-shareholder conflicts, demonstrating that managers accumulate higher than optimal cash. JEL classification: G31, G13

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Section: Accepted Manuscriptsupporting

confidence: 89%

Section: Accepted Manuscriptmentioning

confidence: 99%

Corporate liquidity and dividend policy under uncertainty

Koussis

Martzoukos

Trigeorgis

2017

Journal of Banking & Finance

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“…Financially healthy plan sponsors can make use of the discretion allowed when setting actuarial assumptions and legally use this freedom to improve their financial flexibility. Such an interpretation would be consistent with Gamba and Triantis [] and Kisser [], who show that cash has a flexibility value in the context of security issuance costs and even in the case of zero leverage. However, for plan sponsors with high leverage and significant underfunding, there likely exist negative welfare effects for many stakeholders.…”

Section: Decisions By the Plan Sponsor's Managementsupporting

confidence: 87%

Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?

Kisser

Kiff

Soto

2017

J of Accounting Research

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We use historical particularities of pension funding law to investigate whether managers of U.S. corporate defined benefit pension plan sponsors strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities—one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10% and the difference further increases for underfunded pension plans. Underfunded plans tend to assume substantially higher discount rates and lower life expectancy. The effect persists both in the cross‐section of plans and over time and it serves to reduce cash contributions. We further show that plan sponsor managers use the freed‐up cash for corporate investment and that credit risk is unlikely to explain the finding.

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“…Lee & Powell (2011) show that cash rich firms will underperform if they persistently hold excess cash for more than three years. Fresard (2012) shows that cash holdings are sensitive to stock price movements, while Kisser (2013) points out that cash flow volatility decreases the value of cash. Liu & Mauer (2011) show that CEO risk taking (vega) has a negative impact on the value of cash savings to shareholder, since excess cash savings benefit debt holders rather than shareholders due to risk-taking incentives induced by high vega compensation.…”

Section: Related Literaturementioning

confidence: 99%

Are excess cash holdings more valuable to firms in times of crisis? Financial constraints and governance matters

Chang

Benson

Faff

2017

Pacific-Basin Finance Journal

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This study examines the impact of cash holdings on firm value before and during the 2008 financial crisis, conditional on financial constraints and corporate governance. We show that the equity market places a higher value on corporate cash holdings during the financial crisis and cash holdings are more valuable to constrained firms, compared to unconstrained firms. However, the triple-interaction of cash with constraints and crisis shows the crisis value effect for constrained firms is weaker than for unconstrained firms. Further, the triple-interaction of excess cash with governance and constraints shows that a positive governance effect on corporate cash holdings is more pronounced for firms that are financially constrained.

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The Real Option Value of Cash*

Cited by 18 publications

References 41 publications

Corporate liquidity and dividend policy under uncertainty

Corporate liquidity and dividend policy under uncertainty

Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?

Are excess cash holdings more valuable to firms in times of crisis? Financial constraints and governance matters

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