Implications of Cash-Hoarding for Shareholders

28 Pages Posted: 11 Oct 2006

See all articles by Derek Oler

Derek Oler

Texas Tech University - Rawls College of Business

Marc Picconi

College of William and Mary

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

Oler, Derek and Picconi, Marc, Implications of Cash-Hoarding for Shareholders (October 20, 2005). Available at SSRN: https://ssrn.com/abstract=936398 or http://dx.doi.org/10.2139/ssrn.936398

Derek Oler (Contact Author)

Texas Tech University - Rawls College of Business ( email )

P.O. Box 42101
Lubbock, TX 79409
United States
806-834-2354 (Phone)
806-742-3182 (Fax)

Marc Picconi

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

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