The Influence Of Accounting Conservatism On Cash Holdings And Cash Value Research

As the most liquid current asset found on a business' s balance sheet, cash is essential to an enterprise, because the daily operation and investment can't be carried out without it. For an enterprise with liberal supply of cash, it is usually a must to hold cash and cash equivalents for financing. Cash is a more likely target for taking over by major shareholders and the management of the enterprise compared with other assets. Its high liquidity makes it hard for outside investor to supervise and manage it. Cash reserve usually affects an enterprise's dividend policy, investment policy and financing policy. The value of cash holdings differs among enterprises with different cash reserve. Accounting conservation, an important quality feature of accounting information, has been widely applied to cut principal-agent costs, promote financing, lower the risk of legal actions, and provide guidance for choosing promising investment projects. With updating accounting rules, China's accounting conservatism is on the rise. Accounting conservation includes unconditional conservation and conditional conservation. They have different impacts on both the cash reserve and the value of cash holdings.The paper makes a literature review mainly about the impact of unconditional conservation and conditional conservation on cash reserve and the value of cash holdings. It then adopts the data of the Shanghai and Shenzhen A-share Listed Companies between 2008 and 2013 for an empirical research. It also applies the cumulative accrued model for the measurement of unconditional conservation, and C_SCORE for that of conditional conservation. A regression model is established to test the impact of unconditional conservation and conditional conservation on the value of cash holdings. It finally adopts the Value of Cash Holdings Model proposed by Faulkender and Wang to test the impact of unconditional conservation and conditional conservation on the value of cash holdings. The finding suggests that unconditional conservation serves as a driving force for cash reserve and a resistance to the value of cash holdings, while conditional conservation acts as a negative factor for cash reserve and an impetus for the value of cash holdings.