Implications of Cash-Hoarding for Shareholders
28 Pages Posted: 11 Oct 2006
Date Written: October 20, 2005
Abstract
Agency theory suggests that firms with very high cash balances ("cash hoarders") are likely to misinvest their funds. However, if investors do not fully recognize the implications of a high cash balance, then future returns may be predictable for cash hoarding firms. We find that these firms significantly underperform over the two years following their identification as hoarding. Contemporaneous returns are significantly negative in the year that a prior cash-hoarding firm reports a significant decrease in cash. Our results suggest that investors do not fully appreciate the implications of a high cash balance for future returns, but do recognize problems when that cash is subsequently spent.
Keywords: cash level, free cash flow theory, future returns, market efficiency
JEL Classification: G14, D21, G31
Suggested Citation: Suggested Citation
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