When is cash king? International evidence on the value of cash across the business cycle

Jiaxing You (), Ling Lin (), Juanjuan Huang () and Min Xiao ()
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Jiaxing You: Xiamen University
Ling Lin: University of Massachusetts Dartmouth
Juanjuan Huang: Xiamen University
Min Xiao: Xiamen University

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 3, No 12, 1131 pages

Abstract: Abstract Precautionary-motive theory implies that corporate cash holdings should be valued at a premium during recessions when uncertainty is high. However, from an agency-conflict perspective, business downturns aggravate agency problems, and investors tend to discount the value of corporate cash holdings during recessions. We test two hypotheses derived from these competing perspectives by examining the value of cash across different phases of the business cycle, using a sample of firms from 41 economies over the 1991–2016 period. Our results show that $1 of cash is valued about $0.67–$0.70 higher during a boom than during a recession, supporting the agency-conflict hypothesis. Our analyses show that this effect is not sensitive to national uncertainty-avoidance tendencies but varies with different levels of investor protection. These results confirm that investors discount the value of cash during recessions due to concerns about severe agency conflicts, and that investor protection mitigates this discount.

Keywords: Business cycle; Value of cash; Precautionary motive; Agency conflicts (search for similar items in EconPapers)
JEL-codes: E32 G32 G34 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-019-00820-9

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