Financial Characteristics, Accounting Conservatism And The Value Of Corporate Cash Holdings

Cash is the most liquid assets within the enterprise, and cash level is an importantcontent of corporate financial decisions. In order to meet the transaction, precautionaryand speculative demand, enterprises must maintain a certain level of cash holdings.However, Holding excess cash also can produce a lot of opportunity cost, and may leadto serious agency problem. Different enterprises have different optimal cash holdingslevel, the value of cash holdings is also not identical. And the value of cash holdings isclosely related financial characteristics, condition of internal governance and externalmarket environment factors and so on. Based on the analysis above, this paper studiedthe marginal value of cash holdings of listed companies in our country, and furtheranalyzed the influence of financial characteristics and accounting conservatism on thevalue of cash holdings.At first, This paper reviewed the domestic and foreign literature about the value ofcash holdings and accounting conservatism, and summarized relevant theory about cashholdings and accounting conservatism. Then, based on theoretical analysis of therelationship among financial characteristics, accounting conservatism and the value ofcash holdings, this article selects data from2008to2012of the Shanghai’s andShenzhen’s A-share listed companies, adopting Faulkender and Wang’s model toconduct empirical test to check the marginal value of cash holdings of listed companiesin our country. The results showed that, under the system background of coexistence ofagency costs and asymmetric information, the marginal value of cash holdings of listedcompanies in China is lower than its nominal value, the average value of cash holdingsis only0.475yuan. At the same time, this paper establishes corresponding empiricalmodel to analyze how financial characteristics affect cash holdings marginal valuerespectively from three aspects including the level of cash holdings, financial leverageand corporate growth. It showed that: the higher the cash-holding level and the financialleverage of listed companies in our country, the lower the marginal value will be; Thehigher the company growth, the higher the marginal value of cash holdings will be.Besides, this paper further studied the relationship between accounting conservatismand the value of cash holdings. It respectively uses two proxies including the negativeof the ratio of nonoperating accruals and the conservatism score to examine theaccounting conservatism’s impact on the marginal value of cash holdings. The resultsshowed that when companies and managers are committed to more conservative reporting, equity investors will value cash incremental more. Accounting conservatismcan effectively alleviate the principal-agent conflict, and promote internal managers touse cash more effectively via the governance mechanisms, thus improving the marginalvalue of cash holdings.