Value of Cash Holdings and Accounting Conservatism

Corporate Social Responsibility Disclosure and the Value of Cash Holdings

“…This literature recognizes the importance of corporate governance and financial reporting information in mitigating the value destruction associated with cash holdings (e.g. Chen, Harford, & Lin, 2015;Dittmar & Mahrt-Smith, 2007;Frésard & Salva, 2010;Louis et al, 2012;Masulis et al, 2009). We extend this understanding of mitigating influences by revealing that non-financial disclosures also help mitigate the value destruction associated with cash holdings.…”

“…Consistent with the importance of firm-specific information for the effective monitoring of managers' use of corporate resources, recent papers on the value of cash holdings find that the marginal value of cash decreases as analysts' forecast dispersion increases (Drobetz et al, 2010), decreases after a reduction in analyst coverage due to brokerage closures and mergers (Chen et al, 2015), and increases with accounting conservatism (Louis et al, 2012). Chen et al (2015) argue that analyst coverage influences the marginal value of cash because the information distributed by analysts helps investors detect poor managerial decisions.…”

“…Chen et al (2015) argue that analyst coverage influences the marginal value of cash because the information distributed by analysts helps investors detect poor managerial decisions. Louis et al (2012) argue that accounting conservatism is relevant because earlier disclosure of project losses facilitates investor intervention to mitigate the risk of poor managerial investments.…”

“…Arena & Julio, 2015;Faulkender & Wang, 2006;Frésard & Salva, 2010;Masulis, Wang, & Xie, 2009) and suggest that high-quality financial disclosure can facilitate monitoring to mitigate the value destruction associated with cash holdings (e.g. Drobetz, Grüninger, & Hirchvogl, 2010;Louis, Sun, & Urcan, 2012).…”

Information Consequences of Accounting Conservatism

“…When these negative effects are not recognised, additional information asymmetries arise between managers and investors, as investors make assessments of firm future prospects based on incorrect assumptions about the investment portfolio of the firm. Prior research by Francis and Martin (2010), Ahmed and Duellman (2011), Bushman et al (2011), Louis, Sun, andUrcan (2012) and García Lara, García Osma, and Penalva (2013) shows that conservatism plays an important role in reducing investment inefficiencies. Conservatism constrains ex ante the investment in negative net present value projects as it does not permit current managers to defer the recognition of losses to the next generation of managers.…”