Accounting Conservatism And The Value Effect Of Cash Holdings

In recent years, more and more researchers are coming to focus on the problem of cash holdings. Among their studies, they have reached agreement on the scope of cash they used for study. Cash holdings generally refer to the total of money funds, bank deposits and short investments held by corporation. Study on cash holdings includes two aspects, one is effect factors of cash holdings and the other is market response of cash holdings. Extant research has paid more attention on effect factors of cash holdings; therefore research results of market response are not rich. Jensen(1986) raised free cash flow hypothesis based upon agency theory; he thought that there are inevitable agency problems between managers and shareholders which makes managers’ holding cash a kind of self-interest behavior. Therefore, market value of cash held by corporations is less than its book value, which means holding cash leads to some discount effects. After the adoption of new Chinese Accounting Standards since2007, is the value effect of cash holdings held by Chinese listed corporations consistent with the logic of agency theory?The economic consequences of accounting conservatism are a heated research topic in past decades. However, little attention has been paid to test the effects accounting conservatism would have on the marginal value of cash holdings. If the value effect of cash holdings is consistent with the logic of agency theory, what is the effect of accounting conservatism which alleviates agency problems in all(as Watts(2003) implies) on it? Meanwhile, different controlling shareholders correspond to different levels of accounting conservatism; under this circumstance, what will happen to the relationship between accounting conservatism and the marginal value of cash holdings?This essay employs the empirical data of Chinese A-shared listed companies from year2007to2012to deeply elaborate the above-mentioned questions. The research results show that:(1)in accordance with agency theory, cash holdings of listed companies suffer a discount loss; accounting conservatism plays a positive role on the relationship between cash holdings and corporation value, and this finding is in line with the standpoint that accounting conservatism can alleviate the agency problems between managers and shareholders; the nature of controlling shareholders does not influence the relationship between accounting conservatism and value effect of cash holdings, however the effect of accounting conservatism on the marginal value of cash holdings is different under different controlling shareholders; accounting conservatism promotes the marginal value of cash holdings in state-owned companies significantly, but it does not promote the marginal value of cash holdings in non-state-owned companies; and there is no evidence to show that accounting conservatism promotes the marginal value of cash holdings in non-state-owned companies deeper than that of state-owned companies.