How does real earnings management affect the value of cash holdings? Comparisons between information and agency perspectives

Che-Chia Chang, Li-Han Kao and Hsin-Yu Chen

Pacific-Basin Finance Journal, 2018, vol. 51, issue C, 47-64

Abstract: In this paper, we investigate whether real earnings management is associated with the precautionary benefits or agency costs of cash holdings. We find that real earnings management impairs the value of cash holdings. However, the value of cash holdings is not associated with accrual-based earnings management, which has no effect on cash flows. Our results show that real earnings management impairs the value of cash holdings mainly in firms having potential agency problems or firms facing financial constraints. Moreover, our results indicate that different means of real earnings management influence cash flows from operating, investing, or financing activities, and impair the value of cash flows from the respective business activities. Overall, our results support the conclusion that real earnings management is associated with the agency costs of cash holdings.

Keywords: Corporate cash holdings; Real earnings management; Agency problems; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G3 M41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:51:y:2018:i:c:p:47-64

DOI: 10.1016/j.pacfin.2018.06.001

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